I put $5k in a dependent care FSA for 2017. After moving my wife has not gone back to work. She has looked for jobs, but has not found something that fits. Is there any way that we or someone else can salvage at least some of the money? Her mother can watch our child from our house and we can pay her. To what level is looking for work necessary to qualify? Is there an income requirement if she worked something part time in December?
"Looking for work" only enables the FSA to the extent of her actual earned income. That is, day care expenses can be qualifying for up to 12 months of the year if she is actually paying for the care so she can be out of the house looking for work, but the maximum dollar amount allowable is whatever she actually earns. I'm afraid there aren't any loopholes that would allow you to get the money back if she doesn't get a job by the end of the year.
Some employers allow unused funds to be carried forward for 2 months into the next year. If your employer allows it, that gives you some extra time to find a job.
As a follow up question, if the FSA was used to cover babysitting expenses and then it was determined that all or part of the reimbursement was ineligible because the spouse did not earn enough income I understand how the income tax is paid. However, what about the social security? That was not withheld from the employee, but the employer would not have paid his half either, correct?
The money was taken out of your pay before all taxes and if it is forfeited it goes back into income on the return where you will pay fed/state taxes on it HOWEVER it escapes FICA taxes forever ( a little known secret and only loophole you will get in this situation).
Similar situation. My wife worked 6 months and then left her job. We used childcare after while she looked for work. She hasn’t found work yet. Can we use the FSA for those childcare expenses even though she hasn’t found a new job?
Yes, you can still use the FSA since she did work and has earned income. The amount that can be used may be limited depending on what her earned income was during the 6 months she worked.
Also, only the childcare expenses that were directly related to her looking for work during her period of unemployment would be eligible. So, if your child was in daycare and she was running errands or not actually looking for work, those expenses would not be considered eligible.
She has plenty of income, but the income was earned in 2019 before she started looking for a new joband using childcare. Since she left her job, we have used childcare as she has looked for a new more flexible job.
Here are a few things to note.
Part 1 - Your employer, whom you enrolled in the Dependent Care Benefit (DCB), does not look at you spouses income and work. That is verified on the tax return. So if you enroll for the full $5,000, your W2 taxable wages for federal, state, social security, and medicare taxes will all be $5,000 less than if you did not enroll (automatically saving $382.50 in FICA taxes). You then need to submit qualified expenses to your employer to be reimbursed. You can even have the child's grandparents babysit (or anyone other than a spouse or other dependents) if you submit to your DCB administrator a signed claim form that has their address, tax ID, and amount claimed.
Part 2 - Completing Form 2441 on your tax return. It is the end of the year and you have a W2 showing $5,000 in dependent care benefits. But your spouse has $0 income for the year (or any amount less than the $5,000 benefit). The Form will now show the benefit is TAXABLE and will add it to your wages at the top of your tax return. This means that your employer may not have withheld enough Federal and State Income Taxes to cover the amount due. HOWEVER, the amount still shows as exempt from social security and medicare so even if only one spouse works, it still nets a savings of $382.50.