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

Forum|Forum|7 years ago
June 1, 2019
1 reply
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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?

TurboTax Deluxe Mac

Opus 17

Level 15

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.

jason_y_natalia

Level 2

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?

Anonymous

@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?

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.

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!