I have a 5,000 childcare FSA, but spent ~11,000. Why can't i claim that extra 6,000 for the Dependent Care Credit?

[Opus 17]

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@Yankfanros  wrote:

I believe as long as you don’t actually submit a claim for 2021 expenses using your 2021 fsa funds you can roll those fsa funds over to 2022 (and use for 2022 childcare expenses) then you can claim the full 2021 childcare tax credit even with making the fsa deductions in 2021 (since there’s no claims for 2021 expenses)….that’s what I’m planning on doing

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That's partially correct, but it's complicated.  See here.

https://www.irs.gov/irb/2021-21_IRB

If you planned ahead and did not ask for reimbursement, and paid out of pocket, you can claim the 50% credit, and use the 2021 FSA money in 2022 as a carryover.  However, this may be limited by the carryover rules of your plan.  Not all plans allow carryovers and the timing and amounts allowed may vary.  If you left too large a balance or can't spend it in time in 2022, you will lose the funds.  

Also, it's too late for anyone to do this who did not plan ahead.  If you requested reimbursement for 2021 expenses from your 2021 FSA, you can't decide to apply the credit instead.  

Turbotax will take the FSA benefit from box 10 and will then ask you how much you left in the account as a carryover. 

[Yankfanros]

@JillS56 turbotax allows you to not claim any of your fsa 2021 funds for 2021 and then use childcare tax credit instead for a bigger tax credit.

“The carryforward is only allowed for the excess of your FSA contribution.” what’s the source for that?  

[gregcg]

Please explain the benefit...If W2 and Social Security income are each reduced by 5000 but that 5000 is then reported in Box 10 of the W2, how does that reduce your income tax?  All it does is to reduce your FICA costs since the Box 10 entry does NOT increase Social Security/Medicare expenditures.

[KrisD15]

Dependent Care Benefits listed in Box 10 on a W-2 is not included in Box 1 and not taxed (income tax)

Credits lower your income tax due.

You can't use funds which are not subjected to income tax to lower your income tax.  

According to the IRS:

"Box 10 of your W-2 shows the total amount of dependent care benefits that your employer paid to you or incurred on your behalf. Amounts over $5,000 are also included in box 1."

[LWT3]

A dollar of tax credit is more valuable than a dollar excluded from income.  A one dollar tax credit reduces tax liability by one dollar.  Each dollar put into an FSA on a pre-tax basis used to pay for childcare expenses reduces tax liability by the taxpayer's marginal tax rate times the contribution (e.g., 22% x $1 = 22 cents). 

[LWT3]

Although a dollar of tax credit is worth more than a dollar excluded from income, the Child Care Tax Credit does not result in a dollar for dollar reduction in tax liability.  In 2022, the Child Care and Dependent Care Tax Credit reverted to 35% of up to $3,000 in child care expenses for one child or $6,000 in child care expenses for two or more children, after a brief pandemic-related increase. As before, the percentage of child care expenses you are allowed to claim goes down as your income goes up.