Dependent care FSA and actively-looking-for-work spouse who has rental income.

[LTV]

I have a Dependent care FSA account of $5000 with my employee and have been claiming reimbursements. However, my wife who has been actively looking for work and have all email records of job applications and interview invitations hasn't been successful in landing a job this year yet. She does have rental income though. Would you please let me know if we are still eligible for FSA? If not, do I have to return the $5000 reimbursement I received to my employee or how should I file tax return to avoid any filing error and pay the correct tax amount? And is there any penalty? Thank you so much.

[xmasbaby0]

In order to get the childcare credit both spouses have to work and earn income.  The "looking for work" part is often misunderstood to mean just seeking employment means you can get the credit.  Not so.  She has to actually become employed and earn income in order to qualify you to get that childcare credit.  If she did not find a job and work, then your FSA funds will just become taxable income.  The rental income is passive income and will not help you get the childcare credit.  Sorry.

[LTV]

Would you please let me know that how I should pay for tax for the Dependent care FSA fund $5000? My employee has not withhold any tax for the $5000 amount. Thank you so much.

[xmasbaby0]

It will be calculated along with everything else on your tax return, and will affect your refund or amount of tax due at tax time.  The software will calculate it when you enter your W-2 with the data that is on it.  In other words, you have $5000 of untaxed income now--it will be taxed when you prepare your tax return.

[LTV]

Thank you so much for all the details and info!

[Carl]

If you *think* you may have an under tax withholding penalty if/when that $5K FSA money is taxed, you might want to go ahead *right now* and pay tax on that money. You can pay online at www.irs.gov/payments.

Basically, if at tax filing time the amount you owe the IRS is more than $1000 or more than 10% of your total tax liabiillty (whichever is *higher) then in addition to paying those taxes, you'll be assessed an underpayment/under withholding penalty. It all really depends on how much was withheld from each of your paychecks in 2019, which was based on the W-4 you filed with your employer at the beginning of the year. So if necessary you can go ahead and pay the IRS say, $500 "RIGHT NOW" and if it turns out you've overpaid, it will be refunded to you when you actually file the return.

The above also holds true for your state, if your state taxes personal income.

[Valebu87]

What about if I received unemployment benefits as the spouse that didn’t work this year? Are we eligible for dependant care fsa?

[Opus 17]

No.  While care is "qualified" if one spouse is looking for work, the actual dollar amount of the credit is limited to the income earned from working for the lower-earning spouse.  Unemployment compensation is not considered earned income.