Taxes owed on carryover dependent care FSA?

[Anonymous]

Like many we did not use our dependent care FSA in 2020 but my wife’s company will allow the FSA contribution to carryover into 2021. We received information from our tax preparer that we will be responsible for the unpaid taxes on the $800 contributed to the FSA in 2020.

I was told this is because the tax forms require us to input what the dependent care FSA money was spent on in 2020 and if it wasn’t spent, it is considered taxable income.

Is the correct? Every year we have carryover from the health care FSA and have never owed taxes on that so I don't see why the dependent care would be different. Thanks!

[BillM223]

I was told this is because the tax forms require us to input what the dependent care FSA money was spent on in 2020 and if it wasn’t spent, it is considered taxable income."  

That used to be true - use it or lose it.   However, now that so many employers allow you to carry over unspent amount into the first 2 1/2 months of the next year, things are different.

Furthermore, the IRS has passed updated regulations because of COVID-19 that permit employers to modify their plans for 2020 and 2021 to make it easier to carry over unspent amounts in 2020 into 2021. Please see this notice in the IRS newsroom.

Note that IRS Notice 2021-15 can be found here.

So two conclusions:

1. you are not taxed on the unspent amount until you have run out of time to spend it (according to your employer's FSA plan).

2. You need to go right now to the HR department to see how your company has modified the rules for dependent care FSAs in light of the IRS notices.

[Anonymous]

Thanks. If we did not spend any of the $800 in the FSA and the full amount is being carried over into 2021 do I need to fill out anything on form 2441? We had zero dependent care expenses in 2020. 

[KrisD15]

You shouldn't. TurboTax is aware of the change for tax year 2020. 

"The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax years 2020 and 2021, the CAA allows employers to provide a grace period of up to 12 months into to following plan year for carrying over unused healthcare and dependent care FSA balances."

TurboTax Talks FSA

[piniu]

I have a similar situation. My 2020 W2 box10 is $5000 from FSA dependent care. But I only spent $1000 in 2020. There is no where to input $4000 as 2020 carryover to 2021. I am using TurboTax Premier 2020. It says "The dependent care you must pay taxes on is $4000". Need help to fix this!

[DawnC]

FSAs operate with a "use it or lose it" policy, meaning that you must use all of the money you deposited into the account for qualified expenses by the end of the plan year or you will lose your money.   Since you received a tax deduction on $5K of your income, but only used $1K of the money, you are required to pay the taxes back on the $4K that you did not use.   If you had other child care expenses, you can enter these in the Dependent Child Care Credit section which will keep those funds tax-free.  

Many employers will offer their FSA participants a grace period or a rollover provision, which ensures you won’t lose funds as soon as a new plan year starts.  See your employer’s benefits guide or HR representative if you’re unsure if you have one of these options.    @piniu

[piniu]

My company allows 2020 carry over to use until July 2021. In the form 2441, there is a line 14 "Enter the amount, if any, you forfeited or carried forward to 2021. See instructions". But in turbo tax premium, this input is not available. I do not see why I should pay for the tax of carryover FSA $4000. 

[BillM223]

To find the question about how much you had left over from the Dependent Care FSA, please revisit your W-2 interview, for the W-2 interview that had the entry in box 10 (for the FSA).

Once you enter the box 10 amount, TurboTax will wonder if you had an FSA, and so in the screens subsequent to the actual W-2 data entry screen, you will be asked if you had a Flexible Spending Account (FSA).

When you answer YES, the next question will be "Any leftover money in your Flexible Spending Account?" - this is the question you are looking for.

This is correct for the desktop software. The Online software is not always the same, but in any case, go back through the W-2 interview and see if the question pops up as I described.

Does this cover your question?

[gk2742]

I am in the same boat as the original poster. Turbotax premier online is adding the unspent 2020 Dependent Care Flexible Amount to income even though the amount can be rolled over into 2021. How do we specify in premier online that unspent amount should be rolled over and NOT be taxed.

[Opus 17]

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@gk2742 wrote:

I am in the same boat as the original poster. Turbotax premier online is adding the unspent 2020 Dependent Care Flexible Amount to income even though the amount can be rolled over into 2021. How do we specify in premier online that unspent amount should be rolled over and NOT be taxed.

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Go back to the W-2 interview and step through it carefully.  When Turbotax sees you have entered a value for box 10, it should ask you if any amount was forfeit or rolled over (it may simply ask "was any amount left in the account?"). If you skip that question, or answer zero by mistake, Turbotax will believe that all the money was paid out, and amount that was paid out but not used for care is considered taxable.   You need to go back and tell the program that there was money left in the account.