Is there a problem if W-2 shows box 10 Dependent Care Benefits used in the previous year, due to employer's fiscal year?

[adville]

Hi - 

My spouse's employer has a July 1 through June 30 fiscal year (and the same plan year for their benefits). Her W-2 shows an amount in box 10 for the current year (2021). We don't have any qualified child care expenses in 2021, but all of the withheld amount was validly used. Will TurboTax inappropriately add the deducted amount back in to my federal taxable income?

This arose because:

1. We stopped incurring eligible child care expenses in late 2020 due our child's age.
2. We listed a certain amount of child care expenses at the start of the plan year, so my spouse's employer spread the pre-tax deductions through the entire plan year - a portion of which was in 2021, even though the expenses were all in 2020.
3. We didn't lose any money from the FSA, because the 2020 expenses had already been submitted, so we were reimbursed as the remaining deductions were made.

I just want to make sure TurboTax isn't increasing my spouse's taxable wages by the Box 10 amount out of the assumption that it wasn't used on eligible dependent care. (If, instead, TurboTax isn't doing anything with that amount from a tax perspective--but just assuming we lost it by not having eligible expenses, that's probably fine, since we know we actually got the money back.)

Thanks!

[adville]

Update: The Form 2441 that is generated does seem to have the entire amount withheld in the current year treated as taxable. (Line 16 is limited to "qualified expenses incurred in 2021" so it is zero. So, the entire amount withheld drops down into line 26 and then gets added to 1040, line 1.) Is there any way to match up these funds with the expenses they were deducted to pay, so that this is properly treated as not taxed?

[BillM223]

"but all of the withheld amount was validly used." - Maybe it's Monday, but I keep wondering what you used it on if not in 2021.

Remember that while your employer has a fiscal year plan, you as a taxpayer have a calendar year tax return. So tell me again when you spent the money that was withheld in box 10 on your W-2? Was it in the first half of 2021?

[adville]

That's the question: whether we are totally out of luck because, although we submitted the expenses to my spouse's plan when they were incurred in the 2nd half of 2020, they didn't actually deduct the remainder of the amounts from her pay until 2021. 

It that's the case it answers my question.

However, it certainly would feel like we drew a short straw (to say it politely) as a result of her employer's weird plan year. (I.E. the funds were validly contributed to the plan on a pre-tax basis, and we actually had the corresponding expenses, but the plan wouldn't be serving its purpose if at the end of the day we don't get to use the funds as intended - to pay for dependent care on a pre-tax basis.) We would effectively have to line up deductions and expenses every half year (or other division if the fiscal year ended some date other than 6/30) not to have such a mismatch.

[JohnB5677 · Accepted solution]

Generally speaking, you cannot deduct expenses from a previous year on this year's tax return. You can only deduct expenses in the year that you paid for them. Each tax return reports finances for its own year and each of those years needs to be kept separate.

These are the two guidelines that apply:

1. The total amount of dependent care benefits you received during the year, (this is box 10)

2. The total amount of qualified expenses you incurred during the year,

Although the company has a split year, you should have gotten a full year's benefit on your W-2.  How was that used?

[adville]

Thanks a lot for the helpful answer. 

If I understand your question, one of these two answers is response, but I'm not sure which: a) because my son turned 13, we didn't have enough later expenses in 2021 to match up with the rest of the year's deductions. And b) in 2020, we had a nanny (until the pandemic put an end to that), so there were more than enough expenses to match up to the 2020 box 10 dependent care benefits (not counting the expenses from later in the year that I had, until now, thought would match up with the benefits in the 2H 2020-1H 2021 plan year). 

Thanks again @JohnB5677. Not the answer I was hoping for, but I appreciate the help.