Tax Year Prior to 2020: Dependent Care FSA enrollment while spouse was unemployed

[mbenitez97]

I mistakingly signed up for a Dependent Care FSA and received reimbursement when my spouse was unemployed (I did not fully read the rules for eligibility and was unaware of the rules when I filed my claim for reimbursement).  My husband has been actively looking for work but did not earn an income during the time that I contributed to the FSA.  How do I correct this mistake on my tax return so that I am properly paying taxes on the money I was reimbursed?

[Opus 17 · Accepted solution]

It will be corrected on form 2441.  Your FSA will be captured from your W-2, and you will be asked additional questions about whether you forfeited any amounts, how much you paid for care, and who the provider and dependent were.  Because your care will be non-qualified (due to no spouse job), the amount taken from the FSA will be added back to your taxable income.  Fortunately, there is no additional penalty, just the income tax.

[bryan99999]

Variant of this question--What happens if my spouse is underemployed. For example, if spouse is only earns $3,000, but a $5,000 dependent care flex spending account was opened. Spouse was looking for, but unable to secure, additional work.

Can we take $3,000 out of flex spending, pre-tax, and then file a form 2441 for the remaining $2,000 as taxable income?

Sorry, confusing, we know. THanks in advance

[mcalde007]

What if i requested 5,000 on my DCSFA through work for my daughters child care/pre-k but then my wife loses her job mid year?  She can now take care of my daughter, would i be able to cancel the remaining withheld money?

[KarenL]

@mcalde007 You would need to speak with your employer to cancel any future withholding.  Any remaining amount will be reconciled at tax time.  Remember, this is pre-tax money that is being withheld. 

[michiganner]

Thanks for your answer. 

I have a specific question:  Due to the COVID-19, I keep my son at home from daycare. My wife was unemployed since March of this year and she stay at home taking care of our child. I have some money of dependent care FSA in my account. I am wondering if I can pay my wife with the FSA money? 

[Critter-3]

No you cannot pay your spouse from the FAS.  Due to the change in situation because of covid check with your employer if you can stop the contributions and/or how much time you will have to use it up in 2021.

[Opus 17]

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@michiganner wrote:

Thanks for your answer. 

I have a specific question:  Due to the COVID-19, I keep my son at home from daycare. My wife was unemployed since March of this year and she stay at home taking care of our child. I have some money of dependent care FSA in my account. I am wondering if I can pay my wife with the FSA money? 

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No, you can never pay the parent of the child as a caregiver.

Additionally, care is only qualified if it is provided so that you and your spouse can work or look for work.  So your use of the FSA in that way would be doubly improper. 

The IRS released a modified rule back in March or April that would allow employees to stop their FSA deposits in mid-year (which is normally not allowed).  If you did not stop your deposits, I'm sorry that was a missed opportunity.  Your employer should have notified you of the option.  If you did stop your deposits and you are still stuck with a balance, I'm afraid you are stuck.  The IRS guidance also allows that if your plan ends before Dec 31, 2020 (some plans have different fiscal years), you can spend your balance for qualified care up to 12/31/2020.  But your wife would have to go back to work before the expenses would be qualified. 

Any relief for money stuck in dependent care accounts would have to come from Congress.

[michiganner]

Thank you so much for your kind reply. I actually have hired a nanny for a couple of month. However, I gave her cash and she didn't have receipt for me. I am wondering in this case can I get reimbursement from FSA? 

[Opus 17]

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@michiganner wrote:

Thank you so much for your kind reply. I actually have hired a nanny for a couple of month. However, I gave her cash and she didn't have receipt for me. I am wondering in this case can I get reimbursement from FSA? 

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The IRS charges the FSA administrator with enforcing the rules on reimbursements, they will probably want a receipt at the very least and may wants a W-10 from the nanny giving her social security numbers.

Then, when you file your tax return, you will have to provide the name, address and SSN of the nanny, or else the expenses won't be qualified, and will be added back to your taxable income.

(If you can somehow get the money out of the FSA, and don't qualify on form 2441, then at least you have paid the expense with taxable funds instead of losing the amount.  But I would have gotten a W-10 from the nanny, even if that meant you paid her more to cover the taxes that she was avoiding by being paid under the table.)

[jason_y_natalia]

I thought the IRS states that the unemployed can be "looking for work" to be eligible for the DCFSA? Does it actually require them to have income during the year? If so, how much? 

[Opus 17]

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@jason_y_natalia wrote:

I thought the IRS states that the unemployed can be "looking for work" to be eligible for the DCFSA? Does it actually require them to have income during the year? If so, how much? 

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Unemployed is not "looking for work" unless you are actually actively looking for work.  However, that only makes the expenses qualified for the credit.  The dollar amount of the credit is still limited by your actual wages.

Suppose you paid $500 per month for care, but for 10 months you were not working or looking for work.  Only 2 months of your expenses are qualified, and you should only enter $1000 as your qualified expenses.  But, if you were looking for work for those 10 months, you can enter the full $6000 as your qualified expenses.  

But then when it comes to calculating the credit, it will be based on whichever is less, your qualified expenses or your actual wages.  If you looked for work for 10 months and worked for 2 months and your wages were $4000, that's the maximum qualifying expenses even though the care itself was qualified for the whole year.  Or, if you were unemployed all year, you won't get any credit because even though your expenses are qualified because you were looking for work, your qualifying expenses can't be more than your actual wages from working. 

[Anonymous]

I just wanted to make sure if I understood correctly.

This is my case:

I am full time employed and contributing Dependent Care FSA for $3000 per year. We do married filing jointly.

My spouse lost her job but actively looking for the new opportunity. While she is looking, she began working as part time tutor -- so I guess she is self-employed. I expect her earn less than $3000 by end of this year.

In this case, because her expected income is lower (e.g. $2000) than my contribution ($3000), the cost to day care facility will be non-taxable for $2000. Then, there is no penalty but last $1000 will be taxable. Am I understanding right?

Thank you!

[Opus 17]

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@Anonymous wrote:

I just wanted to make sure if I understood correctly.

This is my case:

I am full time employed and contributing Dependent Care FSA for $3000 per year. We do married filing jointly.

My spouse lost her job but actively looking for the new opportunity. While she is looking, she began working as part time tutor -- so I guess she is self-employed. I expect her earn around $2000 by end of this year.

In this case, because her expected income is lower ($2000) than my contribution ($3000), the cost to day care facility will be non-taxable for $2000. Then, there is no penalty but last $1000 will be taxable. Am I understanding right?

Thank you!

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Correct.  You can draw the entire $3000 from the FSA to pay the center, if that's what your cost actually is.  Then, if your spouse's earned income from working (W-2 wages plus self-employment income) is only $2000, the remaining $1000 will be added back to your taxable income, but without a penalty.  

One other tweak, when someone is self-employed, their "earned income" for this type of calculation is their net income after expenses minus half their SE tax.  This is to create an equivalence with W-2 workers who pay social security and medicare tax.  So if her net income is $2000, the amount eligible for the FSA will actually be $1847.