How do we determine how much we can deduct in a dependent care FSA? I have it through work, my spouse is disabled on Social Security Disability starting last year. My understanding that him being disabled exempts us from the both spouses working requirement, but since the limit is based on the income of the lower earning spouse, how is that determined? Would SSDI be considered earned income, but only a portion is taxable, depending on our total income. This is our first time using an FSA so just learning about all this. Thanks!
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Q. Would SSDI be considered earned income?
A. No
For a disabled (or fulltime student) spouse the IRS allows you to enter a fixed number ($3000 for a full year).
From the form 2441 instructions:
For each month or part of a month your spouse was a
student or was disabled, he or she is considered to have
worked and earned income. His or her earned income for
each month is considered to be at least $250 ($500 if you
had two or more qualifying persons at any time during
2021). Enter that amount on line 5. If your spouse also
worked during that month, use the higher of $250 (or
$500) or his or her actual earned income for that month.
The IRS will allow $250 or $500 per month of imputed income for your disabled spouse, meaning you can qualified child care expenses up to $3000 or $6000. The FSA maximum is $5000, of course. If you are paying for care for 1 child and you have an FSA larger than $3000, the extra amount will be added back to your taxable income, but there is no additional penalty.
@Ledillon1 wrote:
@Hal_Al and @Opus 17 Thank you for your responses. Ok, so I can put up to $3,000 in my DC FSA account for the year to reimburse for childcare expenses?
Correct.
I should also point out (something that should have been mentioned before), just because your spouse receives disability income does not, by itself, qualify you to claim dependent care expenses.
Your spouse must be unable to care for themselves (and therefore unable to care for your child) so that it is necessary for you to put the child in daycare so that you can work. If your spouse can care for themself, then you don’t qualify to claim the dependence care credit even though your spouse may have a medical disability.
The tax code definition of disabled is not necessarily the same as the definition of disabled for SSDI or other forms of disability insurance.
Thank you for that additional information. How could that be determined for the IRS?
Opus is right that the definitions of disabled are different between SSDI and the Dependent Care Credit.
IRS Pub 503 (which is about the Dependent Care Credit) says the following: "You may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who isn't able to care for himself or herself. " (emphasis mine).
The implication is that this credit is for expenses that you must pay to provide necessary care for someone, including your spouse.
In the case of a spouse who is "disabled" for SSDI purposes, "disabled" means you must not be able to engage in any substantial gainful activity (SGA) because of a medically determinable physical or mental impairment(s) that is either:
Please see this Social Security Administration webpage to see what the definition of "gainful activity" is.
So, as Opus says, in the case of SSDI, disabled means that you can't work at a job (more or less) while disabled for purposes of the Dependent Care Credit means that your spouse can't even care for your child or dependent (much less themselves), hence you have to incur expenses for the care for your spouse. This is a much stricter definition.
The easiest way to show this is to show receipts for expense you incurred in providing care for your spouse; this would go a long way to showing that your spouse isn't able to care for himself or herself. A statement from a physician would help.
An alternative way to look at this is, if your spouse - even if collecting SSDI - is able to provide sufficient care for your dependent (whether or not he/she actually does), then you do not qualify for the credit.
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