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?

[nitadragoo]

So I have done the following, but since there is only one income and AGI is over turbotax kick me out of the interview and doesn't ask me about expenses.  I am looking for the get around as filling out the form 2241 doesn't work either.  Suggestions?

[AmyC]

You have one income, the other parent is not disabled and does not work, you do not qualify for dependent care expenses. See Publication 503, Child and Dependent Care Expenses.

The FSA was a reduction in income to cover qualified expenses. Your expenses are not qualified, so it becomes taxable. Here are the IRS FAQs for government entities regarding Cafeteria Plans.

@nitadragoo I believe we may have some discrepancies in what is being said. Therefore, my answer begins with the assumption.

[nitadragoo]

Thank you for the links and info.

So if that is the case, why doesn't turbotax ask me about carryover FSA amount from 2019?  In 2019, we had $2,500 in FSA account and that was the amount on the 2019 W2-line 10.  When asked the leftover amount , $2,500 was entering but turbotax didn't add that back to earned income it just zero?  We had the same situation in 2019,  one income, no student or disabled.  Both years our AGI was max.   So wouldn't the $2,500 be taxable in 2020? 

So apparently, FSA account for dependent care is not a benefit for us.  So just so know for 2021 taxes, even if I had some earned income....How much would that need to be?  Does it matter if I had earned income as our AGI is maxed disqualifies us?

Thanks for your assistance.

[JoannaB2]

No, you can't claim the extra $6,000. The maximum allowed expenses for Child and Dependent Care credit is $3,000 per eligible dependent for up to 2 children.  Your FSA contribution of $ 5,000 can be used towards dependent care expense.  If your have 2 eligible children, then you can claim out of pocket costs of $1,000. While previously unused FSA funds couldn't be carried over to the next year, IRS suspended those rules due to COVID crisis.  Please see tax relief due to COVID crisis for additional information . To claim the credit, you may only enter $ 3,000 ( $6,000 for 2 children) in the form.  Your FSA contribution is pretax and isn't included (as wages in your W2) to pay for medical and dependent care expenses. .

[nitadragoo]

This answer really doesn't answer the question I posted....was it meant for someone else?

[JoannaB2]

Yes, I'm sorry, I misunderstood your question.  If you received $2,500 from your FSA in 2020, and only one spouse had income, then the entire amount on Box 10 of W2 will be included as income in 2020.

In Turbo Tax, you are asked to enter any amounts from your FSA that were not distributed to you for qualified expenses.  Any remaining amount in your account will be have to be entered on that screen and will be forfeited in 2020. The forfeited amount would reduce the taxable amount in Box 10 of W2. FSA doesn't allow rollover on any remaining amount from the plan. 

This is from the link on the screen "I want to know more about this" on the screen "Any leftover from your  Flexible Spending Account ?".

Any money that was not reimbursed because you did not incur enough qualified dependent expense count as being forfeited: 

For example, under your employer plan, you have $5,000 pretax amount towards dependent care, and you only incurred $4,500 so the remaining $50 would be forfeited.  You would either enter $50, in this screen, the amount forfeited, or $50 carryover into next year, if permitted by your employer.

[nitadragoo]

Okay....closer.  Here is the whole back posts in a lump:

We contributed to dependent spending (FSA) for 2020 through husband's work and is noted on his W-2 box 10 for $5,000.  We carried over, in the plan grace period $2,500 from 2019.  All funds ($7,500) were used in 2020 to pay for preschool tuition.

We only have one income and AGI is too much so we do not qualify for child and dependent care credit, so Turbotax kicks me out of the interview as also not full time student or disabled and does not allow me to enter expenses.

Turbtax then adds the FSA funds of $5,000 to taxable income on line 1 of 1040.  We used the 2020 FSA - $5,000 and 2019 FSA - $2,500 to pay for preschool tuition expenses in 2020.  We were under the impression that FSA fund were pre-tax and only need to have qualified expenses for the funds to pay out, which preschool tuition is a qualified expense.  So from past posts we are finding out that there is more qualifications needed to make FSA spending account beneficial otherwise it is taxable…..correct?  So basically, in our situation the FSA funds are taxable…correct?  Why can’t the qualified expense be offset by the FSA funding similar to a Medical FSA account?  And why is it not asking me about the carryover FSA funds from 2019, which is on Form 2441?  Wouldn’t those be taxable too?  You mentioned the funds would be forfeited, but we used the funds to pay 2019 expenses it just happened in Jan 2020. 

Thank you for your assistance.

[BillM223]

"We only have one income and AGI is too much so we do not qualify for child and dependent care credit," - to be more accurate, there is no AGI limit on the credit, but if your spouse does not work and is not disabled or a full-time student, then you two don't qualify for it, no matter what your AGI is.

"so Turbotax kicks me out of the interview as also not full time student or disabled and does not allow me to enter expenses." Yes, if TurboTax realizes that you do not qualify, it terminates the Child and Dependent Care Credit interview. There is no point in asking for your expenses, because the amount of the credit is based on your qualified expenses, and by definition, you don't have any.

Remember, as noted above, this credit is specifically to enable both spouses to work, unless one is disabled or a full-time student.

"We were under the impression that FSA fund were pre-tax and only need to have qualified expenses for the funds to pay out, which preschool tuition is a qualified expense." - Yes, FSA contributions are normally pre-tax, when you have entered qualified expenses, but since you can't enter any qualified expenses (because of the spouse not working), the box 10 amount is added back to income.

It is added back to income because it was removed from Wages in box 1 before your W-2 was printed. 

"Why can’t the qualified expense be offset by the FSA funding similar to a Medical FSA account?" - Because the definition of what is a qualified expenses is different between the two.

"And why is it not asking me about the carryover FSA funds from 2019, which is on Form 2441?  Wouldn’t those be taxable too?" - You are not asked about these funds because they are not relevant to your 2020 Child and Dependent Care credit. But they aren't taxed in 2020 (like they would have been in 2019) because you didn't receive the income in 2020...they just disappear.

As you have now surmised, until your spouse either starts to work or is disabled or becomes a full-time student, there is no point in having a dependent care FSA. It just makes you think that you're getting a tax break when you can't. Better to have your employer include the box 10 amount in Wages in box 1...you'll still pay tax on it, but at least you get to keep the money.

@nitadragoo

[Mike9241]

@nitadragoo 

FSA's are a type of employee benefit a/c.  the bad thing about them is by law it's use the a/c for the qualified expense or lose it (any unused money goes back to the employer).   employers that offer FSA you set a maximum $ limit overall and then have a list of items that you can select from.   

[ilduegno]

Can we can an update to this advice now for the year 2021? I think congress has increased the limit for the dependent care FSA to $10,500. I am trying to determine whether I should increase the limit to the maximum level for this year, and whether that would benefit me given the also increased child tax credit for this year. 

[nvarjas]

ilduegno, I have the same question.  Have you been able to find the answer? 

[Opus 17]

For 2021 (including FSA plans that start in 2021, even if they run on a different calendar, like July 1, 2021 through June 30, 2022) the child and dependent credit will save you more money than an FSA as long as your income is less than $200,000.  (Above that, it gets very tricky to calculate.)

The maximum dependent care FSA for plans starting in 2021 is $10,500 but the maximum eligible expense for the credit is $8000 (1 child) or $16,000 (2 or more children) and the credit is up to 50% of expenses, greatly increased from the 20% most taxpayers got before.

However, this is only for tax year 2021, and for FSA plans that start during 2021.  The credit and FSA rules go back to normal for tax year 2022 and for plans that start on or after January 1, 2022.  

[Critter-3]

Talk to your employer for the information on the FSA limitations and the ability to change the amount and when it can be done.

https://www.irs.gov/newsroom/irs-issues-guidance-on-taxability-of-dependent-care-assistance-programs...

DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT

Regardless of which health plan you choose, you can elect a Dependent Care FSA. This account can be used for dependent child expenses up to the age of 13. Once your child reaches age 13, they are no longer eligible. This account is used to reimburse you for dependent care expenses, such as child day care, elder care, etc. The contribution limits for 2022 are:

• $5,000 per year per household
• $2,500 for married individuals filing a separate tax return

2022 IRS Changes Due to COVID-19:  

Health Care FSAs – Employee may:  

• FOR 2022 ONLY:  Carry-over of ENTIRE 2021 BALANCE into 2022 if enrolled for 2022

Dependent Care (Child Care) FSAs – Employee may:

• FOR 2022 ONLY:  Use funds for dependents up to age 14 (previously 13)
• FOR 2022 ONLY:  Carry-over of ENTIRE 2021 BALANCE into 2022 if enrolled for 2022

*Employee MUST ELECT THE FSA FOR 2022 IN ORDER TO RECEIVE THE 2021 CARRY-OVER*

https://hr.psu.edu/2022-flexible-spending-accounts

[Yankfanros]

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

[JillS56]

No, that is not true.   It has nothing to do with whether or not you have submitted a claim for 2021 or not.   

The carryforward is only allowed for the excess of your FSA contribution.   You cannot elect to carry forward the full amount and then take the credit for 2021.  It doesn't work that way.  That would be considered double-dipping and the IRS is not going to allow you to double-dip.   TurboTax is not going to allow you to carry the full amount forward and then give you the full child care credit.