Why don't I qualify for a child and dependent Care Credit?

[alexge]

Hi,

I've gone through the  Child and Dependent Care Credit but it said I am not qualified. When I check the reason,

It said

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Since your $11,200 in care expenses wasn't enough to use up the $4,985 you contributed to your employer's dependent care plan, your Child and Dependent Care Credit is $0.

The $1,985 of unspent care benefits will be added to your W-2 as taxable income.

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The above statement seems wrong. 

$4,985 is my contribution to my Dependent Care FSA and it is smaller than the $11,200 care expenses. I should also claim credit for the rest of the amount.

Also, where do $1,985 of unspent care benefits come from? I already used all of $4,985 to cover part of the $11,200 expenses.

Instead, I think I should get 20% (AGI based) * 3000 (one child max) = $600 credit.

Please help me understand if something is wrong with Turbotax online premium.

[Critter-3]

Sorry ... the program is correct.  If you only have one child then the max the credit can be taken on is $3000 and the form 2441  applies the FSA amount in box 10 of your W-2 against the first $3K  of expenses paid  thus you have nothing more left to take the credit against.  

Now if you had 2 or more qualifying  kids in day care the limit would have been $6K thus you would have had a credit on the amount over the $4985 ... $1015 x 20%. 

FYI ... for the good news ... you did not pay federal or FICA taxes on the amount you did put in the FSA so you got the benefit upfront instead of on the tax return.  $4985 x (.0765 + your tax rate ... I will use 22% for this example) = $1100 taxes saved up front on your paycheck vs $3000 x 20% = $600 on your return ... so you win. 

[alexge]

Thanks for the quick answer. I have a follow-up question

when you said 

  " you did not pay federal or FICA taxes on the amount you did put in the FSA"

This seems not true. According to the statement "The $1,985 of unspent care benefits will be added to your W-2 as taxable income." and my 1040 Form line 1e there is $1,985, meaning I am still taxed for the amount.

This amount is a part of Dependent Care FSA, it should be free of tax if they are used for dependent care, I don't understand why it is still taxable.

[BillM223]

What Critter-3 said about dollars sent to the FSA is true. Any dollars shown in Box 10 on the W-2 (which the employer transfers to your FSA) are not taxable IF AND ONLY IF they are shown to have been used for child and dependent care expenses, according to form 2441.

As you wrote, "it should be free of tax if they are used for dependent care". The problem is that they weren't used for dependent care expenses, because they exceeded the $3,000 limit for one child, as documented by the 2441.

What you should try to do - if your employer will let you according to the terms of the FSA - is try to carry forward the $1,985. It won't help you this year, but you will be able to apply it to dependent care expenses next year.

The real problem is that Child and Dependent Care expenses doesn't work the way that most taxpayers think. You are not allowed to deduct all the dollars that you spent on child care, but only dollars that you can show meet the rules on the 2441, and which don't exceed $3,000 for one child or $6,000 for two or more. The rest of the dollars bring you no tax benefit.

Also, the $5,000 for the FSA must meet the rules of the 2441. In your case, with one child, your tax benefit can apply to only one child, so a limit of $3,000. Since the remaining $1,985 cannot satisfy the rules of the 2441, then it must be automatically added back to your taxable income (because the entire $4,985 was removed from Wages in box 1 before the W-2 was printed.

You might look at the TurboTax FAQ "The Ins and Outs of the Child and Dependent Care Credit" but note that this article is focused on the credit and not the deduction but both are a function of form 2441.