Under-contributed to Dependent Care FSA for 2021, can I deduct the rest from my taxable income?

[tarzan1234]

My company has open enrollment in May and I set up a Dependent Care FSA of $5000 (as it was allowed at that time). It was then converted into monthly contribution of just over 400  bucks a month. Now it's the end of the the year, my contribution to the FSA is just over $2000 for the 2021, that's much less than the actual limit of $10500 for the year (married filing jointly). Our actual daycare expense for 2021 is about 15K. Now I understand that I can reimburse for the $2000 something that I already contributed (through payroll deduction). My question is: Can I claim the remaining amount (10500 minus the 2000 something I already contributed) and deduct that amount from my taxable income? Or I'm stuck with the 2000 something in my FSA?

[Mike9241 · Accepted solution]

My question is: Can I claim the remaining amount (10500 minus the 2000 something I already contributed) and deduct that amount from my taxable income?

No

Or I'm stuck with the 2000 something in my FSA?

No

you complete form 2441 Child and Dependent Care expenses

here's how it works for 2021

A) actual expenses are limited to $8K for 1 qualifying dependent or $16K for 2 or more qualifying dependents.  this is reduced by the dependent care amount

so for 1 dependent the limit wound be $8K- $2K = $6K

for 2 or more $15K (your actual expenses are less than $16k)  - $2K = $13K

B) the lessor of the following:

1) the amount from A)

2) your earned income

3) your spouse's earned income

C) then if your AGI is $125K or less 50% of the amount from B

if your AGI is over $125K see page 7 on form 2441 instructions for % to use

if your AGI is over $438K you get nothing

https://www.irs.gov/pub/irs-pdf/i2441.pdf 

the result is a tax credit that flows to schedule 3 line 2

[tarzan1234]

Thank you very much, Mike, for your detailed answer. This is very helpful. Wishing you a wonderful holiday season and happy new year!

[jawckey]

I am also a user like you and not a tax professional. I noticed that lot of questions here were left unanswered! Probably the so called tax professionals who watch here ... will reply only if they are paid! So, I am posting what I know ... may not exactly what you want ....

In case of Dependent Care FSA, you get only what you put. So, in your case you can at best get the tax benefit of $2K only. Unless DC-FSA is actually deducted from your pay check, IRS will not give tax benefit. But you can try one caveat. You have 4 more days left in the year. So pay a lumpsum of (10.5 - (5 - 2)) = 7.5K one shot to the provider in these four days and get a receipt. Then claim 7.5K credit by attaching form 2441 to your 1040 (read publication 503, not hard to read). BTW, you need to fill out 2441 worksheet to find the credit limit that applies to your income. It could be more or could be less than 7.5K. I am assuming that you will anyway end up paying the provider whether DC-FSA is approved or not. So you don't lose anything by paying 7.5K that you anyhow owe. If you owe less, pay only that much. You need to take out (5 - 2) out of 10.5K because next year jan to may, your employer will give that credit next year. But before you do it helps you are not, try filling 2441 worksheet to see if you qualify for the credit at all. Usually employers when they offer 5K limit, that is usually most folks who get DC-FSA qualify. So it is possible that you may not get any credit :(

This is a trick ... looks harmless ...

[BillM223]

There are generally two ways to get tax benefits from Child or Dependent Care:

• Income excluded through your employer
• The Child and Dependent Care credit on actual expenses

It is important to remember these two cases. As Mike explained above, depending on your situation, you may qualify for both.

The income equal to contributions to your Dependent Care FSA is found in box 10 on your W-2. This amount is not even included in your income, so it is tax-free, so long as you spend your FSA dollars on Dependent Care.

As Mike noted above, $8k is the limit for tax benefits for one dependent ($15k for two or more). So if you don't reach the $8k limit with your FSA contributions (box 10), you can use the remaining amount (up to the limit) to apply towards the tax credit on form 2441.

NOTE, if you have an entry in box 10 of your W-2, TurboTax will prompt you to make the entries that apply to the 2441 (Child and Dependent Care Credit), so TurboTax will walk you through being able to take advantage of the income exclusion (box 10) and the credit.

Mike gave you a good description of what happens tax-wise, but just let TurboTax walk you through the 2441, and refer back to his comments to understand what you did.