Unused FSA Funds

[markwood]

I deposited $2,000 into a FSA account that I did not use.  In going through the interview associated with the W-2, I answered "no" to the question regarding on-site child care.  The next screen asks if I had an FSA which I answered "yes".  The next statement reads "If you had any money left in your account at the end of the year, enter the amount here. If you used it all, just enter 0.".

I entered $2,000 and my tax refund increased!  I would have thought that the taxable income would have increased since the FSA account is funded with pre-tax dollars which were subsequently not used.  No, I didn't actually get to use the $2,000 but I previously avoided paying taxes on the contributions.

Why did the refund amount increase instead of decrease?

[AmeliesUncle]

I think the program had ALREADY decreased your refund.  But when you entered the amount, it removed the decreased amount.

[markwood]

Why would a pre-tax contribution affect tax liability based simply on entering a W-2?  Again my logic tells me that I avoid income taxes during the year and that taxes should now be due on the tax-sheltered amount.  What am I missing?

[AmeliesUncle]

When first entered the W-2, the program assumes you did NOT qualify for it.  So it immediately makes it taxable.

After you enter the child care information, it potentially removes or changes that.

Because it was unspent (and other carried over or forfeited), it is NOT taxable.  If it was allowed to be carried over, it still qualifies as pre-tax because it will be used for qualifying expenses (or eventually forfeited).  If it was forfeited, you've already lost $2000, so they don't make you pay tax on something that you've forfeited.

[Mike9241]

FSAs are use-it-or-lose-it type of plans. since you don't get back any unused $, there is no tax benefit to tax