My employer offers a Dependent Care FSA account, which is a pre-tax account that I can divert some of my paycheck to and can be used to pay for childcare.
The account is use-it-or-lose-it. If we don’t use all the money in it, then it’s just gone, so it’s important not to put too much aside.
It also only gets tax benefits up to the amount of earned income that the parent who earns the least earns, and that’s the part I want to ask about. I think that if my wife ends up not earning income next year, then as long as we can use all the money on dependent care, there won’t be a downside apart from filling out a bunch of paperwork to get reimbursed, we just won’t get any tax benefit. Am I right about that?
Nothing is forcing you to claim the deduction on your taxes, so it just will come out of your paycheck and then immediately back while you don’t do anything special come April.
The downside is sometimes some minimal fees (couple bucks). I don’t know about a bunch of paperwork, I just take a photo of daycare’s invoice, and upload through a short web form. If you’re pretty sure she’s not working, don’t bother applying.
Your limit would be $2500 each if filing MFS, but there are many, many ways that that can screw you worse in other parts of your return.
You may still be able to take the separate tax credit instead. Usually not as beneficial, but YMMV.
No, we think there’s a good chance that she will be working, but, like the pandemic getting a lot worse and her needing to care for our children close to full-time (or whatever other black swan awaits us in 2022) is enough of a non-zero risk that I wanted to make sure I wasn’t going to hit some kind of tax penalty in that case.
Thanks for your help. Pretty much confirms my understanding.
I used FSA dependent care for over 14 years. This is not how it works.
Your statement that “It also only gets tax benefits up to the amount of earned income that the parent who earns the least earns” is not quite correct. You can only get reimbursed for child care expenses up to the amount of the lower-earning spouse. If your spouse does not work, and is not looking for a new job, that amount becomes zero and you cannot get reimbursed. It is not the case that you still get reimbursed and merely lose the tax benefit.
The tax benefit comes at the time that the money is withheld from your paycheck. It is a pre-tax expense–it is subtracted from the income that your employer reports to the IRS as taxable, which is shown on your W-2 at the end of the year.
I am not an HR professional. I strongly suggest you talk to someone in your HR department who is an expert at administering the FSA plan
I’m not sure what you are referring to here. If you use an FSA plan, there is no tax deduction involved. Your taxable income is simply reduced, automatically. The FSA withholdings are not reported on your tax return. I don’t know what you think will comes “immediately back.”
I mean, I get reimbursed throughout the year as I pay for childcare, but the amount of income my wife makes won’t be known until the end of the year. How could an unknown amount result in failure to be reimbursed? Obviously they’re going to send me the money if I fill out the paperwork. Who would reclaim it?
My understanding is that at the end of the year, I’ll file taxes, and the amount of FSA money that was reimbursed in excess of my wife’s income will end up on line 29 of Part III of form 2441, Child and Dependent Care Expenses. I will then add it to my income, which undoes the lowered income due to paycheck withholding, and I’m back to even.
They are, on form 2441 Child and Dependent Care Expenses, Part III.
My HR department considers answering question about this to be tax advice, which they do not provide.
Form 2441 is for reporting child care expenses to qualify you for taking the child care credit. If you are paying for child care out of an FSA account, you do not qualify to take the credit.
They should at least be able to tell you your eligibility to participate if you wife does not work.
I am not a tax professional. Although I have a lot of experience using the FSA, if you have any doubts then you should consult a professional.
I’m looking at Part III of my past tax returns where I used FSA money and that part is about FSA money. Here are the directions for form 2441 and they say that Dependent Care FSAs are Dependent Care Benefits, which is what Part III is about.
Also it is possible get both the Child Care tax credit and use a Dependent Care FSA (depending on the amounts and number of children).