Why is federal tax due affected by unused dependent care FSA?

[make1980]

After I entered the amount of around $900 unused dependent care FSA amount for question "Did you have a Flexible Spending Account to pay for child or dependent care? 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.", the federal tax due reduced from more than $1,000 to around $700. Why is that? 

My understanding is that the money in FSA has already been deducted from my salary and it's pre-tax, so whether I used it all or not it shouldn't affect the tax due.

[FangxiaL]

The amount reported in Box 10 of a W-2 form is pre-tax dollars designated for dependent care expenses. If the amount is not used, then it becomes taxable income.  

[make1980]

Thanks for your reply. If the unused FSA is counted towards the taxable income  wouldn't it increase the tax due? That's different from what I saw - tax due actually got reduced after I entered the unused FSA.

Also I'm not getting the money reserved for FSA anyway(since it's unused and I'm not getting reimbursement for that) so why would it affect the tax due?

[RaifH]

Before entering the amount that was unused, TurboTax was assuming it was all unused and entered it as taxable income. Once you entered that only $900 was unused, the remainder of the pre-tax dollars in Box 10 is not taxed, which led to a $300 difference in your taxes. 

[Anonymous]

This is weird behavior. I am in the same situation. I set aside $700 towards Dep care FSA in 2021 and spent it all. I got reimbursed in January 2022. What should I enter? Is it $700 or $0? Since I spent it, I entered $0 and my tax due goes up. I enter $700, tax due goes down. According to you, if TurboTax is assuming it was unused, then shouldn't my tax due go down when I tell it that I have $0 left, which means I used it all? The behavior is exactly the opposite of what you described here.

@RaifH 

[DawnC]

When you enter your child (or qualified dependent) care expenses, the tax on that income will be removed.   Here is what happens-  The money in Box 10 is not included in your wages, so you are getting a tax break.   When you enter the W-2, TurboTax will add the money back to taxable wages because you have not entered your expenses yet (unless you indicate your employer provided on-site care**).   But once you do enter the expenses and care provider info, TurboTax will take the money back out of wages and it will remain untaxable.    Ignore that refund meter....

**If your employer provides on-site care,  TurboTax already has your provider information (from your W-2), so TurboTax doesn't add the box 10 amount to your wages.    If you don't have employer provided care, the amount is added back to wages - but this is only temporary and will adjust once you go through the Child and Dependent Credit section.   

To enter your expenses, you have to go through the Child and Dependent Care Credit section.  Go here for steps on how to get to the Child and Dependent Care Credit section in TurboTax.   

If you want to see the change, look at Line 1 of Form 1040 before and after you enter the expenses.   Before you enter the expenses, the box 10 amount will be included on Line 1 with a DCB notation.   After you enter the expenses, Line 1 will be lower and the DCB gone (if you entered the same amount or more in expenses).

@Anonymous 

@Anonymous

[Anonymous]

This worked. Thanks. When did TurboTax get so confusing? Did all the Product Managers and Designers leave the company? Or have they been sleeping all year?