Dependent Care Expense account reported in Box 10 as Dependent Care Benefits?

[addiemartin2]

My employer withholds $5000 from my pay which I can then use to pay dependent care expenses. They reported it on my W2 as $5000 in Dependent Care Benefits, so it's being subtracted from my $6000 expense eligible for deduction.  So if I had paid taxes on the $5000 instead of putting it in dependent care account, I could have deducted the full $6000? How can that be right?

[AnnaB · Accepted solution]

No, you would not have been able to deduct $6,000.  Please refer to the details below.

First, when you put money from your paycheck into Dependent Care Benefits (generally a Dependent Care Flexible Spending Account (FSA)), you did not pay income taxes on these amounts.  They were taken out before all other taxes which means you saved not only income tax, but also Social Security and Medicare which is an additional 7.65%.  Therefore, you essentially already deducted the $5,000 and received a tax benefit for it.  The amount of your FSA contributions is not included in Box 1 taxable wages on your Form W-2.  That is why it is reported separately in Box 10 because it is only taxable if you don't have the eligible expenses to cover it.  Therefore, it is correct that this is deducted from your eligible expenses in figuring your credit to avoid double dipping of tax benefits since you've already received a benefit on these amounts.

Next, the Child and Dependent Care Credit is not a deduction from income.  The amount is a credit against your tax liability of 20-35% (depending on your income) of eligible expenses.  In your case, you have an extra $1,000 to calculate your credit based off.  Had you not used the Dependent Care Benefits, then you would have had $6,000 in dependent care expenses.  However, you need to look at all factors to determine where the best benefit is.

Please see the following calculations - these are assuming the 25% tax bracket and that you qualify for a 20% Child and Dependent Care Credit (once you exceed $43,000 of adjusted gross income - which is actually lowered due to your Dependent Care contributions - 20% is the maximum credit).  Note that putting funds in the Dependent Care FSA lowers your adjusted gross income and could allow for a higher credit percentage.

• By putting $5,000 into your Dependent Care FSA, you saved 25% ($5,000 x 25% = $1,250) as well as 7.65% for Social Security and Medicare ($5,000 x 7.65% = $383) - this is a total of $1,633 saved before the credit
  

• Next, you have $1,000 in excess expenses to calculate your credit - 20% of this is $200 for a total tax savings between the pre-tax contributions and the credit of $1,833

• Now, say you did not put any money into the Dependent Care FSA with pre-tax funds and used the full $6,000 for the Child and Dependent Care Credit.  You would get 20% of $6,000 which is only $1,200.

• Therefore, you actually saved an extra $633 in this specific scenario (income tax bracket and credit bracket).  However, in general, it will usually work out to be beneficial or the same.

One of the primary things that would impact this calculation is the tax bracket.  Even if you were in the 15% tax bracket, you would still have saved $1,333 in total by using your Dependent Care FSA which is still higher than using the full $6,000 for the Child and Dependent Care Credit.

Note: If you had more than $6,000 in expenses, you should enter all of your expenses.  The $6,000 (with 2 qualifying dependents) is the limit for the credit but you can still enter your total expenses. 

[Malaga1]

My apologies if I am misunderstanding this. I participated in flex dependent expense plan through my employer. They deducted the amounts in each paycheck - therefore I did not pay any taxes on it. However, when filing my taxes via turbotax, it appears to add it back into W2 wages via form 2441 and placed on line 1....essentially creating a larger taxable income. Why is it added back in? Or where do achieve the benefit? It looks like it just deferred my tax liability until tax filing. Hope this makes sense. Thanks.

[Critter]

Ok ... if it was added back into income then you did NOT enter in any qualifying expenses in the Dependent Care Credit section ... review that area to confirm you entered the day care expenses correctly. 

[Critter]

Ok ... if it was added back into income then you did NOT enter in any qualifying expenses in the Dependent Care Credit section ... review that area to confirm you entered the day care expenses correctly. 

[Gringo2005]

I understand everything you pointed out.  What if all things are the same BUT my wife has no income.  It looks like the DCB is being added back to my wages as taxable.  Do both Husband and wife have to have the income for this not to be added back to my wages?

[Aspr123]

I realize this is an old post but exactly matches my question so I’m hoping someone can help!

We also put $5000 in a FSA pre tax for dependent care, but we pay about $19000 in child care each year. 
So 20% of $19000 is $3800 which would mean we qualify for a $3000 credit right? 

So am I correct that we would save more if we didn’t take the $5000 out pretax? (Assuming the 25% tax bracket used in the calculation.)

[BillM223]

No, the maximum amount that can apply to the Child and Dependent Care credit is $6,000, no matter how much you spend. And that's only if you have two or more kids (if you have just the one, the limit is $3,000).

In short, that means that you get no tax benefit for the other $13,000 ($19,000 minus $6,000) that you spend, neither a deduction nor a credit.

In a sense, there is no Child and Dependent Care deduction. All there is is the opportunity to exclude up to $5,000 from your Wages in box 1 of your W-2 (the amount in box 10 is removed from box 1 before your W-2 is printed).

Why $5,000? Because that is the largest amount you can contribute to a dependent care FSA in one year. In many cases, this leaves $1,000 left over to apply to the credit.

You are correct to wonder which method (exclusion or credit) results in a better result for you. The answer is, it depends. The results vary based on the number of qualifying kids, your marginal tax rate, and your adjusted gross income.

Please see this TurboTax Help page on this subject to see if it helps. 

[Aspr123]

Ah, I think my confusion was thinking the credit was up to $3000 rather than the amount that is used to calculate the credit. 

So 35% of $3000 ($1050) would be the max amount anyone would receive from the credit with one child, right?

[BillM223]

"So 35% of $3000 ($1050) would be the max amount anyone would receive from the credit with one child, right?"

Yes, if you spent the whole $3,000 on child care expenses, and did not make any contributions to a dependent care FSA (box 10 on the W-2).

But as you see on form 2441, the percentage that you can use varies between 35% and 20% depending on your adjusted gross income.

[Ritesh Panchal]

TY2020 -- Turbotax is adding back my unused amount to taxable income.

I had contributions of $2,692 towards the dependent care FSA. I see this amount on W2 box 10. Due to Covid we only used up $2,148 towards the dependent care and were only able to get reimbursed for the same.

Now when I enter the $2,148 as expenses in TT towards the Child and Dependent Care Credit, TT is adding the remaining amount $544 back to the taxable income.

Isn't the contributions to the dependent care FSA supposed to be excluded from the taxable income? Why is this happening?

[CatinaT1]

The money in box 10 has to be used for Child and Dependent Care.  That money was put in the FSA pre-tax, meaning it was not included in box 1 of your W2.  Since you had excess money in there beyond what you paid for Child and Dependent Care, that money will be included with wages so they you pay tax on that money.

[Ritesh Panchal]

Is this true even if we are not getting back that money?

[BillM223]

Yes, that is why it is important every year to review how much you have put into the Dependent Care FSA.

HOWEVER, your employer is allowed by the IRS to let you carry over unused funds until March 15th (i.e. next month) or $550, according your plan's documents. You have to ask to find out.

AND, the Treasury Department has created some new rules just for this year that increase your flexibility in your Dependent Care FSA.

Please contact your HR department NOW and ask them to review the IRS Notices listed at this IRS article, and ask them if the company has made any arrangements to help employees in this situation.

[patte108]

So @BillM223 to go further with your reply, I have leftover Dependent care funds that the employer WILL allow to be carried over to 2021 and we fully intend to use them for dependent care.  How do I adjust for this not to be taxable on my 2020 tax return?  Or, amm I forced to pay tax on it now ,and then remember to enter it in as a carryover next year and get the tax break next year? TIA