What do I do if I have been contributing to a dependent care FSA in 2021 but due to new stimulus plan, I would rather take the child care credit in 2021?

[eswest42]

I am very confused on what to do. We just had our second child l, who will be enrolling in child care this year as well and as the start of the year we were pretty close in total benefit between dependent care fsa and child care credit but I still went with the dependent care fsa. Well, now this bill has passed and it has totally changed everything. We were talking about $1200-$1500 in tax savings before, now we are looking at $4000 per child with the child care credit. The problem is, I’ve already contributed to the dependent care FSA for 5 paychecks this year, $1,040 and 1. Do not know if I will even be able to take child care credit 2. If I can,  if this reduces my child care credit amount 3. If it is even possible to just reverse these contributions. 4. Can I even cancel a dependent care FSA contribution for the rest of 2021. It is really hard to plan when the rules changes the 3rd month of the year. I did my due diligence based on facts at the time. Anyone know what is possible? Insanely frustrated. And everything online is about $1,400 stimulus check or advance child tax credit. This seems like a MUCH larger deal for families but completely uncovered.

[DianeW777]

It depends.  It's important to keep in mind that any money you do put in the FSA for the child and dependent care is completely tax free. But I understand your concern, you can't use the credit for any dependent care benefits that are tax exempt. If you are going to use child care for your children, tax exempt is usually the best first choice. This means using the FSA plan first, then if, based on the new higher levels you are eligible to for more in the way of a credit you could use the excess up to the amount allowed. 

Ultimately, the decision is yours and these facts may help you decide.

Changes in your situation due to coronavirus may allow you to do the following with your FSA account (check with your employer):

• Enroll or dis-enroll from your FSA during a non-enrollment period
• Decrease or increase FSA contribution amounts

Maximum Credit:

The American Rescue Plan Act (ARPA) raises the dollar limit on employment-related child and dependent care expenses from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals. In addition, the maximum reimbursement percentage is increased from 35% to 50%. Consequently, the maximum allowable credit amount has been increased to $4,000 for one qualifying individual and $8,000 for two or more qualifying individuals.

Income levels:

This 50% maximum credit amount is reduced, to a floor of 20%, by one percentage point for every $2,000 that a taxpayer’s adjusted gross income exceeds $125,000. For taxpayers with adjusted gross income in excess of $400,000, the 20% maximum credit amount is further reduced for every $2,000 of adjusted gross income in excess of $400,000 until the credit is fully phased out.

[KObri]

I was wondering this also but more from the hindsight perspective.  I upped my Dependent Care FSA to $10,500 and contributed the whole year but didn't realize the Child and Dependent Care Credit was a better option for me until filing my taxes.

Ideally, I'd like to change my taxes so it doesn't look like I received the Dependent Care FSA tax free benefit, pay the tax on the income that was previously tax free and then receive the benefit of the Child and Dependent Care Credit.  I'm not sure if that's possible while not being tax fraud.  Is that even possible?

[BillM223]

The intention of the Dependent Care FSA is to collect tax-advantaged dollars to pay for child and dependent care. 

The purpose of the change in the Taxpayer Certainty and Disaster Relief Act of 2020 was to help taxpayers who suddenly did not have access to child care because of COVID to carry over unpayable amounts in your FSA from 2020 to 2021. This was updated to also allow similar carry over from 2021 to 2022. 

It was not the purpose of the Act to allow you to move contributions around (that you have already spent) to maximize your Dependent Care Credit..

So, have you already spent the $X from the FSA on dependent care in 2021? Then I think you ought to report it that way. This is what would be in your employer's FSA records and the care provider's records, right?

It's true that you report the contributions to the FSA (the amount in box 10 in the W-2) on line 12 of the 2441, and then on line 14, you subtract the amount carried over to next year back out so that you end up on lines 14-26 with all zeroes (which lets you apply all of the $16,000 to the Dependent Care Credit according to the form), but I don't know if this would survive the audit when the auditor notices that you had already spent the $X on dependent care and then decided not to report it that way.

To me this is an unknown situation created by many law changes within a short timeframe, creating unforeseen situations which the IRS perhaps has not addressed. So I am not advising you to do it, but if you do, document everything and go into it with open eyes in case of an audit.

I have looked at Notice 2021-15 and Notice 2021-26 which both address issues related to changes in the dependent care FSA programs (also the changes apply to health care FSAs, but this does not apply to your question).

In both notices, the consistent reference to amounts to be carried over is to "unused amounts", that is, amounts that you or your employer contributed to your dependent care FSA but which you did not spend on dependent care in 2021. 

But if I understand your situation correctly, you have already spent the $X out of your FSA in 2021 on dependent care, so this amount is not an "unused amount". 

Thus, my opinion is that any amounts that you actually paid in 2021 could not be considered for carryover to 2022 and therefore are not eligible for the tax credit.

[KObri]

Thanks for the information.  I thought that would be the case but wanted to check if anyone else had a similar situation.  I was hoping there would be something within TurboTax that would ask what I wanted to use similar to the Standard Deduction/Itemized Deductions.  I appreciate you pointing out there were a lot of law changes in a short timeframe.  I'm going to hold off on adjusting my taxes to reflect a Child and Dependent Care Credit instead of the Dependent Care FSA to see if this is addressed.  It's not worth the additional risk of an audit for a decision I made earlier in the year. 

Thanks again!

[kmart1287]

I'm in the same position. Have to figure this will effect any person that utilized dependent care fsa and has income in any range that will allow for a 50% credit  or any credit above their total tax rate. 

[BillM223]

You should consult with your HR department to see how they have adapted or modified your employer's FSA plan (each employer's plan could be different). Ask them if there is a way to stop any further FSA contributions for this plan year (which may not be the same as your tax year). Once, however, you have withheld dollars from your paycheck for your FSA and spent them on dependent care, it is probably not possible to reroute those dollars to the credit.

@kmart1287

[Opus 17]

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@kmart1287 wrote:

I'm in the same position. Have to figure this will effect any person that utilized dependent care fsa and has income in any range that will allow for a 50% credit  or any credit above their total tax rate. 

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There is no way to reverse your FSA and claim the credit instead, even though it is better.  That is, unfortunately, something you should have researched when it was offered.  

If you took a $10,500 FSA and you had some unspent funds to carry over to 2022, you will be allowed to use those funds in 2022 and use a full $5000 FSA for 2022.  

The expanded tax credit is for up to $16,000 of expenses for 2 or more children, the expanded FSA is up to $10,500.  If you had a $10,500 FSA and paid more than $10,500 for the care of two or more children, the overage will be applied to the 50% credit (up to a max of $16,000 of total qualifying expenses.)

But there is no way to retroactively take the credit instead of the FSA.  Sorry.