Child and Dependent Care Credit - Credit, but amount below Flex Spending

[messner8000]

I have a $10,500 dependent care flex spending account.  I entered this information in TurboTax. I then filled out the section on Child and Dependent Care Credit.  I entered $10,000.  There is a Note that says "You have $10,500 employer-provided benefits.  In order to receive this credit, your expense below must be more than this amount. " 

The amount I entered was less than $10,500.  After I enter this amount ($5000 for each child), the amount listed in TurboTax is still $0 for each child.  I assume this is because the total is below $10,500.  But here is the strange thing: Despite those numbers being $0, when I entered them it increased by Federal Tax refund by several thousand dollars.  Is this right? Seems unlikely since the amount is less than $10,500. 

Basically, I have no idea what is going on! Thanks. 

[ColeenD3]

."The amount that the IRS allows per family is $5,000, not per child. "The maximum amount you can put into your Dependent Care FSA for 2022 is "$5,000 for individuals or married couples filing jointly." FSA

You are not entitled to a credit if your FSA pays for your day care. If you contributed over the IRS allowed amount, non-qualified amounts of dependent care benefits will be added back to your taxable income and taxed at whatever your marginal tax rate is.

[messner8000]

Sorry - but that did did not answer my question.  Could someone else try to respond? Also, the flex spending dependent care amount for 2021 was $10,500 (a one year COVID-related change).  

In case my original post doesn't make sense I can rephrase my question as: Since my total dependent care was less than $10,500, and I had a flex spending dependent care account with $10,500, should I just not fill out the Child and Dependent Care Credit Section (because I am not entitled to a child care credit if I paid for child care entirely with tax-free flex spending funds)?. 

As it stands now, I entered the appropriate child care costs, and Turbo Tax on the main screen nonetheless lists the amounts as $0, yet my tax due decreased substantially. Something seems wrong.... 

[JillS56]

You do not have to complete the Child and Dependent Care form if your child care expenses do not exceed what you paid for child care.   

You are correct that the amount of FSA for 2021 was increased to $10,500.  

FSAs are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from your contribution. The employer may also contribute.

Note: Unlike HSAs or Archer MSAs which must be reported on your Form 1040, there are no reporting requirements for FSAs on your income tax return.  If you have any unused amounts in your FSA, that amount is forfeited, and since you already got a deduction, you cannot deduct the loss.  However, for 2021 due to pandemic legislation that aimed to help families with their childcare costs, your employer may allow you to carry-over your entire remaining Dependent Care FSA balance into 2022 and provide a grace period of up to 12 months following the end of the 2021 plan year to use those funds.

In summary, you do not have to report your child care expenses if you used funds from an FSA to pay the expense.   There is no reporting requirement than through your W-2 for the FSA funds.   

You will want to go back into TurboTax and delete the Child and Dependent Care entries.   

To do this in TurboTax Desktop:

1. Open up TurboTax if not already open
2. Go to Forms
3. Scroll down the list to Form 2441
4. Underneath the Form across the bottom you can select to "print - delete - close" form.  
5. Click on "Delete".  This will remove the form from your return.  

To do this in TurboTax Online:

1. Open up TurboTax if not already opened
2. Click on "Federal"
3. Click on "Deductions and Credits"
4. Scroll down to "Dependent Care Credit"
5. Click "Edit/Add"
6. Click "Yes" to the first two questions (screens)
7. On the next screen click on "Delete" next to the daycare provide listed.

[messner8000]

Thank you @JillS56

Just to make sure I understand: 

(1) I've entered the $10,500 dependent care figure in my tax return (Box 10, Dependent Care Benefits), consistent with my W2. 

(2) My child care costs are less than $10,500. 

(3) Accordingly, I am not entitled to any dependent child care credit.  In other words, the issue isn't that I have discretion on whether or not to claim it, but rather I am not entitled to claim any such credit since I already paid my child care expenses with tax free money.  (Obviously I'd want to claim it if I could). 

(4) Accordingly, I should delete the child and dependent care section as you describe.  

Do I have that right? 

Thanks!

[messner8000]

Just giving this a bump in the hope of getting an answer. Thanks!

[ColeenD3]

You must file a Form 2441. The form is not just used to claim expenses.

This is per the IRS. The difference between box 10 of her W2 and the actual child care expenses she paid will be added to wages on Line 1 of 1040 with DCB and the amount to the left. The difference between box 10 of her W2 and the actual child care expenses you paid will be added to wages on Line 1 of 1040 with DCB and the amount to the left.

Question

Should I include the amount in box 10, Dependent Care Benefits, of my Form W-2 when calculating my income?

Answer

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 $10,500 ($5,250 in the case of a separate return filed by a married individual) are also included in box 1.

You must complete Part III of Form 2441, Child and Dependent Care Expenses to figure the amount, if any, that you can exclude from your income.

DCB

[ColeenD3]

Here is another option that may apply to you.

Line 14 If you had an employer-provided dependent care plan, enter on line 14 the total of the following amounts included on line 12 or 13.

• Any amount you forfeited. You forfeited an amount if you didn't receive it because you didn't incur the expense. Don't include amounts you expect to receive at a future date.

• Any amount you didn't receive but are permitted by your employer to carry forward and use in the following year.

Example. Under your employer's dependent care plan, you chose to have your employer set aside $5,000 to cover your 2021 dependent care expenses. The $5,000 is shown in box 10 of your Form W-2. In 2021, you incurred and were reimbursed for $4,950 of qualified expenses. You would enter $5,000 on line 12 and $50, the amount forfeited, on line 14. You would also enter $50 on line 14 if, instead of forfeiting the amount, your employer permitted you to carry the $50 forward to use during the grace period in 2022. Don't enter on line 14 any amounts that aren't already entered on line 12 or 13. Therefore, if you carried forward dependent care benefits from 2020 to 2021, and you didn't use the benefits in 2021 and are carrying the benefits forward to 2022, as described in Notice 2021-26, you would not enter these amounts on line 12, 13, or 14.

Form 2441 instructions

[messner8000]

Thanks @ColeenD3.! Resurrecting my chain with two final questions: 

I set aside $10,500 (the limit) in 2021 for dependent care expenses through my employer flex spending account.  My actual childcare expenses were less, and I had approximately $1000 left over at the end of the year. I understand from the above (helpful!) responses that because my child care expenses were less than $10,500 I cannot claim the child and dependent care credit, so I deleted my entries in TurboTax associated with that credit.  This leaves me two follow-up questions. 

(1)  I originally stated in TurboTax that I used up all $10,500.  I then realized that was wrong so I indicated that I had $1000 left over in my account at the end of 2021 (which was rolled over).  When I deleted the zero (no money left over) and put $1000, my tax liability decreased (specifically, my refund went up).  Why is that? 

(2) My understanding is that since I had that $1000 left over, I have to fill out a Form 2441.  Is that true? However, when I look at the Form there are lots of blanks (for day care provider, etc.) - do I need to fill those in manually in the form? I'm used to TurboTax prompting me to need to enter everything I need to enter (so that the appropriate forms can be automatically populated).  I'm not sure if something got messed up because I originally filled out the dependent care credit section and then deleted it (when I realized I wasn't eligible for that credit).

Thanks!

[BillM223]

Form 2441 has several functions:

1. to validate the amount in box 10 on your W-2

2. to calculate the amount of child and dependent care credit you should get

3. to report on who was being paid (if anyone) for the child care

As noted above, the amount in box 10 is dollars withheld from your Wages (boxes 1, 3, and 5) spent by your employer for child care and committed by you to your FSA. However, you cannot exclude this box 10 amount, unless you document it how you used it. You document it by telling TurboTax if your employer had on-site day care and by telling TurboTax how much you spent on day care, and who you paid.

If you don't document these things, then the box 10 amount will be added back to line 1 on your 1040 with the code of DCB (i.e. taxed).

So, to answer your question above - yes, if you have an amount in box 10 on your W-2, you have to complete the Child and Dependent Care section (2441).

Second, you are correct that if you spend less money on child dare than what you had in your dependent care FSA, then you are not eligible for the credit...but you still have to complete the section for the child and dependent care credit anyway.

Third, the IRS likes to know from more than one source who is getting what money. They may use this in an audit of the child care place to double-check their income, or they may use it in an audit of you to make sure that you didn't just make the child care place up.

Usually, this would happen in a "letter audit" in which the IRS would write you a letter out of curiosity asking you to verify these child care expenses. Since, you, of course, keep good records of all things affecting your tax return for at least three years, if you tell the truth on the return, all you have to do is make some photocopies and send them to the IRS in response to their letter.

It's really not a big deal. Just answer the questions and you'll be OK.

I am a bit concerned about your statement, "I'm used to TurboTax prompting me to need to enter everything I need to enter", because, in this case, TurboTax certainly does. Please go through your return again in TurboTax and make sure that you indicate that you spent X dollars on your kid(s). That should force the TurboTax screens asking who you gave it to.

If this doesn't work, please come back and tell us.

[messner8000]

THanks @BillM223 ! 

Just to confirm, you said: 

"Second, you are correct that if you spend less money on child care than what you had in your dependent care FSA, then you are not eligible for the credit...but you still have to complete the section for the child and dependent care credit anyway."

So just to double-check...even though I'm not claiming the credit I still have to fill out this part? I was reluctant b/c (for reasons I don't understand) when I fill in this credit section is gives me hundreds of dollars in a refund (which strikes me as odd since my child care expenses are less than the amount ion my dependent care FSA account).  So I wasn't planning to fill it out to try and claim any credit-related money...

[RaifH]

Yes, you still want to fill out this part even though you are not eligible for the child and dependent care credit. 

The reason you are seeing hundreds added back to your refund is not that you are getting the credit. Instead, it is no longer considering the amount you spent on childcare as taxable income. 

Prior to reporting any childcare expenses, it was adding the entire Box 10 amount from your W-2 to your taxable income. Now that you are reporting that $9,500 of the $10,500 was used for eligible expenses, only the remaining $1,000 is being added to your taxable income. 

To verify this, you can preview your return once you fill in your child and dependent care information:

1. Open or continue your return.
2. Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
3. With the Tax Tools menu open, you can then view your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu
4. Scroll down until you see Form 1040 Line 1. Next to this line you will see "DCB" with the amount of taxable child care benefits. This is the amount of Box 10 that was not spent on child care in 2021.
5. Form 1040 Line 31 will have credits that include your child and dependent care credit. If there is a number on this line, you can see what credits you are getting on Schedule 3. Schedule 3 Line 13g is for child and dependent care benefits. If that line is blank or Form 1040 Line 31 is blank, that means you are not getting the credit.