Is the Dependent Care FSA only for the families where both parents work?

[ChelsiE2 · Accepted solution]

To qualify for a Dependent Care FSA, it is not a requirement that both you and your spouse are employed (or disabled).  However, reimbursements from your Dependent Care FSA cannot exceed the lower of your or your spouses (if married) earned income.  This means that to make a Dependent Care FSA work, you both need to be employed (or disabled).

To qualify for the Dependent Care Credit, either both spouses need to be employed or searching for employment.  For more information please see: https://ttlc.intuit.com/replies/3301418

[bklepar]

Thank you! Really helpful. Just one clarification: is there any exempts for non-working spouses who are not allowed to work in US (e.g. H4 status)?

[ChelsiE2]

Unfortunately, no.

[aelevargasmendez]

Thank you for your answer. I have a doubt though when it comes to comparing the IRS Dependent Care Credit versus the Dependent FSA:

-The Dependent FSA allows me to put up to $5,000, which I will surely spend at my present spending rate of $1000/mo ($12,000yr). Under this scenario, I'll "legally" deplete my DFSA in 5 months
-The Dependent Care Credit only gives back 30% of my expenses, up to $6,000, for someone like me with 3-kids. Under this scenario, I'd need to spend $5,000/0.3=$16,667 for getting a credit of the magnitude of my D.FSA, or $6,000/0.3=$20,000 for the full amount of the credit.

My questions are:
1. Knowing that I'll only have $12,000 in child care expenses, am I breaking the law by depleting my $5,000 FSA when the IRS Child Tax Credit clearly states that I'd need to spend $16,667 to get a credit of that amount?
2. If not, how are the DFSA contributions accounted for in my tax return that would make it exempt from this requirement.
3. Related to DFSA vs IRS C&DCC questions 1 & 2, what if the combined wages of one spouse throughout the year fall short of the $5,000 deposited to the DFSA by the higher earner (my wife does direct sales and it's quite passive an income)? What impact would this have in the tax return since all the DFSA money was spent by month #5 (before knowing direct sales would be lag by so much)?

[alexander-radnae]

Thank you for the answer, TurboTax. Can you please share the reference in the IRS official documentation where it states that " reimbursements from your Dependent Care FSA cannot exceed the lower of your or your spouses (if married) earned income"?

[rwabel]

I would also like to get a clarification on the "exceed the lower of your or your spouses (if married) earned income". In the case that the spouse only works part-time or a couple of hours a month would that still qualify? The idea is to put the kids into a pre-school in order to be able to teach yoga, prepare for classes to teach etc. Would that still qualify under dependent care FSA?

[Sandeep1]

both spouses need to be employed or searching for employment.  For more information please see: https://ttlc.intuit.com/replies/3301418

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how does one prove or enter in turbo tax that the spouse was looking for work?

[Cynthiad66]

Just enter the information that is requested in TurboTax.  Whether you look for work is an issue if IRS decides to disallow the deduction then you will have to show proof of looking for work.  Whatever, you do to look for work document it in a log and keep contact info and email trails.

[Opus 17]

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@Sandeep1 wrote:

both spouses need to be employed or searching for employment.  For more information please see: https://ttlc.intuit.com/replies/3301418

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how does one prove or enter in turbo tax that the spouse was looking for work?

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Turbotax will ask if either spouse was looking for work or a full time student.  You don't need to provide further proof unless the IRS asks.  If your income from working (for the months when you were working) is high enough to cover the amount spent on care, Turbotax may not even ask, since that information is not needed to complete the form in that case. 

[daave]

I don't think the IRS has a clarifying document on this, but it's written into the law

https://www.law.cornell.edu/uscode/text/26/129

26 U.S. Code § 129 - Dependent care assistance programs

(b) Earned income limitation

(1) In general

  The amount excluded from the income of an employee under subsection (a) for any taxable year shall not exceed—

  (A) in the case of an employee who is not married at the close of such taxable year, the earned income of such employee for such taxable year, or

  (B) in the case of an employee who is married at the close of such taxable year, the lesser of—

    (i) the earned income of such employee for such taxable year, or

    (ii) the earned income of the spouse of such employee for such taxable year.

[Critter-3]

Here is where there is confusion ... even though you can put INTO the FSA account at work pre tax  if you do not have qualified expenses on the Child Care Credit  form 2441(due to a non working spouse or less child care expenses)  the  FSA contribution is added back into your wages on line 1 of the form 1040 thus negating the tax free aspect of this situation. 

Now for clairity ... your contributions are exempt  federal/state  and FICA taxes  on your paycheck then if you cannot use the credit the amount is added back into wages for federal/state purposes but it still escapes the FICA taxes so worse thing that happens is you save the FICA taxes ...  $2750 x 7.65% = 210.38 saved.