I put $5k in a dependent care FSA for 2017. After moving my wife has not gone back to work. She has looked for jobs, but has not found something that fits. Is there any way that we or someone else can salvage at least some of the money? Her mother can watch our child from our house and we can pay her. To what level is looking for work necessary to qualify? Is there an income requirement if she worked something part time in December?
If you use the FSA and your spouse never finds work, then your use of the FSA will not be qualified. The amounts will be added back to your taxable income (as if you never had the FSA) but there is no additional penalty. If she does find work, then the money you spend would be qualified and would be eligible for tax exclusion. But if you put money in the account and never spend it on care, then it is simply forfeit. And there aren't any tricks or loopholes to get around that.
I thought your question was planning for 2018.
Does your employer allow a grace period to carry forward unused funds? Some do, some don't.
"Looking for work" only enables the FSA to the extent of her actual earned income. That is, day care expenses can be qualifying for up to 12 months of the year if she is actually paying for the care so she can be out of the house looking for work, but the maximum dollar amount allowable is whatever she actually earns. I'm afraid there aren't any loopholes that would allow you to get the money back if she doesn't get a job by the end of the year.
Some employers allow unused funds to be carried forward for 2 months into the next year. If your employer allows it, that gives you some extra time to find a job.
As a follow up question, if the FSA was used to cover babysitting expenses and then it was determined that all or part of the reimbursement was ineligible because the spouse did not earn enough income I understand how the income tax is paid. However, what about the social security? That was not withheld from the employee, but the employer would not have paid his half either, correct?
The money was taken out of your pay before all taxes and if it is forfeited it goes back into income on the return where you will pay fed/state taxes on it HOWEVER it escapes FICA taxes forever ( a little known secret and only loophole you will get in this situation).
Similar situation. My wife worked 6 months and then left her job. We used childcare after while she looked for work. She hasn’t found work yet. Can we use the FSA for those childcare expenses even though she hasn’t found a new job?
Yes, you can still use the FSA since she did work and has earned income. The amount that can be used may be limited depending on what her earned income was during the 6 months she worked.
Also, only the childcare expenses that were directly related to her looking for work during her period of unemployment would be eligible. So, if your child was in daycare and she was running errands or not actually looking for work, those expenses would not be considered eligible.
How do I show that she was looking for work? Is there documentation that I submit?
Just looking for work will not get you the credit ... the person must have actually had at least $3000($6000 for 2 or more kids) of wages for the credit to work in full.
She has plenty of income, but the income was earned in 2019 before she started looking for a new joband using childcare. Since she left her job, we have used childcare as she has looked for a new more flexible job.
Again the form 2441 looks at the entire year ... if both of you had enough income then you have no issue using the credit ... nothing more needs to be said or done.
Here are a few things to note.
Part 1 - Your employer, whom you enrolled in the Dependent Care Benefit (DCB), does not look at you spouses income and work. That is verified on the tax return. So if you enroll for the full $5,000, your W2 taxable wages for federal, state, social security, and medicare taxes will all be $5,000 less than if you did not enroll (automatically saving $382.50 in FICA taxes). You then need to submit qualified expenses to your employer to be reimbursed. You can even have the child's grandparents babysit (or anyone other than a spouse or other dependents) if you submit to your DCB administrator a signed claim form that has their address, tax ID, and amount claimed.
Part 2 - Completing Form 2441 on your tax return. It is the end of the year and you have a W2 showing $5,000 in dependent care benefits. But your spouse has $0 income for the year (or any amount less than the $5,000 benefit). The Form will now show the benefit is TAXABLE and will add it to your wages at the top of your tax return. This means that your employer may not have withheld enough Federal and State Income Taxes to cover the amount due. HOWEVER, the amount still shows as exempt from social security and medicare so even if only one spouse works, it still nets a savings of $382.50.
I am in the same situation in 2020. My wife did not go back to work. We spent part of $5000 in dependent care FSA. How do I handle this case in TurboTax? Does TurboTax know my wife did not get a job because my wife does not have a W2? Should I manually adjust my taxable income and how?
No, do not manually adjust your income. In this case, Turbo Tax did not recognize W2 income for your wife thus takes this into consideration.
My company gives a contribution to my dependent FSA for free (even if I do not make any contribution myself).
What would then happen if I use those money even though my spouse does not work/does not find work?
If you have FSA money and do not use the child care credit because one spouse did not work, then the FSA money which was pre-tax, just becomes taxable income. You cannot get the child care credit unless both spouses worked and earned income.
just to close the loop on the question
1) the question was what happens to the money if @tcolo123 uses it and the spouse does not work?
2) the answer responded to the question "what happens to the money if it is not used."
I suspect the broader answer is that if it is not used as required by the rules (not used or not used when both spouses are working), it's taxable income.
Hi, What if I am on H1B visa and my wife is not authorized to work in the US. Can I use Dependent Care FSA or Healthcare FSA?
@esajad - see these IRS documents: Appears there would be no issue on the HSA, but Child Care would be problematic.
Child Care:
page 9 on the left:
https://www.irs.gov/pub/irs-pdf/p503.pdf
Generally, married couples must file a joint return to take the credit. However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit.
and page 4 on the right:
You Must Have Earned Income
To claim the credit, you (and your spouse if filing jointly) must have earned income during the year.
for the healthcare HSA:
page 3 on the right:
Qualifying for an HSA Contribution
To be an eligible individual and qualify for an HSA contribution, you must meet the following requirements.
• You are covered under a high deductible health plan
(HDHP), described later, on the first day of the month.
• You have no other health coverage except what is
permitted under Other health coverage, later.
• You aren’t enrolled in Medicare.
• You can’t be claimed as a dependent on someone
else’s 2021 tax return.