Child tax credit and child care fsa 2023

[cholland21]

Hello -- my employer offers a dependent care fsa that we contributed the maximum $5k to via pre-tax contributions during the year. We used that money to reimburse ourselves for eligible dependent care expenses (daycare expense for 1 child). I also have 2 other children that both go to an afterschool program and one of the children is in pre-school. Both of these expenses qualify as eligible dependent care expenses. Prior to opening the dependent care FSA, I understood that I could use FSA funds to pay eligible dependent care expense and as long as I separated the pool of funds and could also take advantage of the dependent care tax credit. Said differently, I planned to use FSA funds for dependent care expenses for 1 child which used all of the $5k set aside in the FSA and then use the dependent child care credit on my other two children for expenses incurred at preschool and after school. However, when I input the W2, the $5k is included in Box 10 which TurboTax suggests should only be populated if the employer reimburses for dependent care which is not the case as we simply contribute pre-tax to the account at our election. This is also reducing the available dependent care tax credit. Is it a limitation of the software and I need to manually $0 out Box 10 in the W-2 input screen or a mistake by the employer building the W2 or am I missing something in my thought process?

[BillM223]

1. If you indeed did have an agreement with your employer to contribute $5,000 by payroll deduction to a dependent care FSA, then this amount must appear in box 10 on your W-2. Please do NOT zero it out.

2. The dependent care FSA is a thing that the employer manages for your benefit - you contribute tax-free dollars to it, and then charge dependent care expenses to it.

3. The child and dependent care credit is intermixed with the use of the dependent care FSA. Any dollars that pass through the FSA cannot be used to calculate the credit (otherwise that would be double-dipping).

4. There is a maximum expense that can be attributed to one child, or to two or more children. It's $3,000 for one child and $6,000 for two or more children. If you contribute $3,000 or more to your FSA and you have the one child, then there are no dollars left to use for calculating the credit. If you have two or more children and spend $6,000 on them and also have $5,000 contributed to your FSA, then the first $5,000 is the limit for the FSA, which leaves $1,000 that can be applied to the credit.

5. Any dollars in excess of the $3,000 and the $6,000 provide no tax benefit for you as they cannot be used for the dependent care credit.

[cholland21]

Thank you Bill for the response. I did want to seek clarification on point #3 below. I do understand the double dipping but I also intentionally structured payment to dependent care institutions so I am not double dipping. I am not using the same dependent care expenses as the source for use of FSA contributions and the source for the available tax credit. These are two distinct and separate pools of dependent care expense. Using round and hypothetical numbers, total cost of daycare for one child at XYZ daycare = $10k. I used $5k FSA contributions to pay a portion of that dependent care. AAA preschool for one child costs $8k and after-school care for 2 children cost $5k. These are the dependent care expenses for which I am claiming the dependent care tax credit for 2 children. The expenses are separated and thus no double dipping but the software still prevents the use of full dependent care tax credit on 2 dependents that I did not use FSA funds as that was specific to another dependent and her own unique dependent care institution. Does that help clarify and/or change anything in the response? 

[DawnC]

#3 is not this issue.   You can and should enter all of your expenses in the credit section.   But here is what happens.  You enter the 5K from your W-2, it shows taxable, but when you enter the expenses, that $5k becomes non-taxable.  And then because you have 2 qualifying children, you can take an additional $1k of expenses.   The total credit is up to $6k with 2 children.  But because you already got $5k tax-free from your W-2, TurboTax is only going to apply $1k more of expenses to your Dependent Care Credit.    You should have the $5k tax-free income on your W-2, then you should qualify for the Dependent Care Credit based off an additional $1k of expenses.   

[cholland21]

This is helpful. I understood my research to mean that I could use both as long as there was no double dipping (separating dependent care expense by dependent/institution)  but based upon your response and guidance by the IRS, I understand that the ability to use both is only when there is incremental tax credit available over and above the total amount contributed (and used) out of the FSA. For example $6k credit for 2+ children reduced by $5k max contribution to dependent care FSA leaves $1k credit remaining. 

[DawnC]

Correct!  You technically are using both.   But the total credit is $6K max, with or without an FSA.