I already filed our federal taxes but saw something odd on BakingWithElectricity’s W-2 as I was preparing our state taxes.
She contributed $5000 to a Flex Dependent Care account, but it showed up in Box 10 as a Taxable Child Care Benefit. But that can’t be right. The whole point is to pay child care in pre-tax dollars, so it wouldn’t make sense to turn around and tax it again.
Am I correct in thinking her employer made an error? We’ll call their finance folks tomorrow but I am trying to get the Straight Dope first.
As long at the amounts are correct, then they did not screw up. Box 10 is only taxable if you do not use it, so if you spent $4000 on child care, then the remaining $1000 would be taxable. You need to show the amounts from box 10 on the dependent care deduction form, and let the IRS know whether you used it all, or forfeited any of the money. The amounts spent on childcare would not allow you to have the dependent care deduction for that amount, so you might have to amend your return.
So where do you let the IRS know how much you spent on child care? (I spent it all.)
Like I said, this $5000 is added to my AGI and taxed as regular income, negating the whole point of using a Flex account. But I didn’t see anywhere else on the return to note it. We don’t qualify for a credit on form 2441, so I don’t know where else you can deal with this.
I suspect this has been going on for years and never noticed before.
Form 2441, page 2, line 12 is where it starts, and continues to pretty much the whole second page. It sounds like line 16 would be bigger on your return, so you should need to worry about taxability. If you are using software, it should write “DCB” or something next to 1040 line 7 if it considers any of the benefits taxable.
This sounds very odd to me. My contributions to a Flex Plan (Section 125) are knocked off my AGI. I don’t need to worry about 2441 or any other forms at tax time.
If I didn’t spend all the money, the remainder would be forfeit anyway and so also non-taxable.
That was exactly my thinking as well. However, take a look at Box 10 of your W-2. Does it show up there? It’s supposed to–my wife’s company sent me a copy of the IRS rules for employers to fill out W-2’s.
After I looked at this more closely, I realized my mistake was filling out 2441 but filling it out incompletely. If done correctly, then the $5000 is added in one place and backed out in another. I missed the backout part. If you don’t fill out the 2441 at all, then the $5000 stays below the radar, as in your case.
I could be mistaken but you may be eligible for a portion of the child care credit if you do fill out the 2441, if your actual expenses exceeded your Flex contributions by a certain amount. You might want to take to a look at that option.