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jiminycrickets14
Level 1

Tax on carried over dependent care FSA (DCFSA) funds and distributions over $5,000 (MFJ)?

In 2019, we used $3,500 DCFSA and carried forward $1,500 to 2020.

In 2020, we had qualified expenses of $6,000 and used the $1,500 carried over from 2019 (during the grace period) plus an additional $4,500 from DCFSA 2020 ($5,000 contributed).  We carried forward $500 to 2021.

Our 2021 qualified expenses will be more than $7,000.

 

It seems for 2020, we are having excess $1,000 taxed as non-w2 wages?  Is $5,000 the limit which can be distributed in any one year including the amount carried over from the previous year?  

3 Replies
BillM223
Expert Alumni

Tax on carried over dependent care FSA (DCFSA) funds and distributions over $5,000 (MFJ)?

$5,000 is the limit per year that you can spend on child and dependent care expenses and have those expenses cover your contributions to your FSA.

 

To be able to exclude contributions to your Dependent Care FSA (box 10 on your W-2), you have to show that you spent the money on child and dependent care.

 

You got a $3,500 tax benefit in 2019, but carried forward $1,500 to 2020. You contributed $5,000 in 2020, for a total of $6,500 available for 2020. Then in 2020, you spent $6,000, which covered the $1,500 from 2019 and $3,500 of the 2020 FSA contribution. Since you carried over $500 to 2021, this leaves $1,000 in 2020 which is not covered by qualified child and dependent care expenses.

 

That $1,000, which had been excluded from income, gets added back to income because it was not able to be applied to any qualified expenses (which are indeed limited to $5,000/yr).

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jiminycrickets14
Level 1

Tax on carried over dependent care FSA (DCFSA) funds and distributions over $5,000 (MFJ)?

Thank you! Wouldn’t carrying forward $1,500 from 2020 into 2021 then not result in being taxed on the $1,000 if used during the grace period for qualified expenses?

BillM223
Expert Alumni

Tax on carried over dependent care FSA (DCFSA) funds and distributions over $5,000 (MFJ)?

"Wouldn’t carrying forward $1,500 from 2020 into 2021 then not result in being taxed on the $1,000 if used during the grace period for qualified expenses?"

 

Well, yes, except you have already spent the money in 2020. You don't have any money (beyond the $500 that you did not spend) to carry forward to 2021.

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