dcFSA AND Child and Dependent Care Tax Credit?

[Mgmny]

Hello!

I have tried googling it, but I can't seem to get a clear answer. Can i claim up to the $6000 (at 20%, of course) for the Child and dependent care credit if i also had $5000 in dependent care FSA if my total expenses were $20,000 in 2022?

I'm trying to use CashApp Taxes to file my return, and their calculations are saying that my credit is reduced by the dependent care FSA amount of $5000, so  i am only eligible for $1000 in credit (at 20%, so really only $200). But, it seems to me that I'm not double dipping because I have a total of $20,000 in expenses, and after the dcFSA is applied, that leaves $15,000, so i should be eligible for the full $6000 (i have 3 kids) in expenses for the 20% credit.

I've tested their calculations, and the credit instantly jumps to $1200 once i remove the line on my W2 saying i received $5000 in dcFSA, so i know this is where their calculation is coming from. When i talk to their customer service people, they are mostly clueless, but keep saying that I can't double dip. Can someone confirm or deny my understanding here?

I know this is sort of convoluted, so happy to clarify. I really appreciate your help, thank you!!

[MoseyingAlong]

Their calculation is correct. It's only the first $6,000 of expenses paid that matter, not the total you paid. And then you remove any paid thru the FSA.
If you want to see the form to calculate it, it's 2441.

[Mgmny]

Their calculation is correct. It's only the first $6,000 of expenses paid that matter, not the total you paid. And then you remove any paid thru the FSA.
If you want to see the form to calculate it, it's 2441.

Hmm.... dang! Can i get creative with the math? Can i say $5000 FSA was for child 1, and 15,000 was for children 2 and 3??

[Mgmny]

Just ran through form 2441. Seems like it doesn't care about which dependent gets which dollars. That's a bummer. Thanks for your help.

[Mgmny]

Hmmm... This article by smart Asset says I should be able to do both....

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit

In their example, they said you can claim the credit with additional out of pocket expenses that the dcFSA didn't cover... 

[MoseyingAlong]

Hmmm... This article by smart Asset says I should be able to do both....

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit

In their example, they said you can claim the credit with additional out of pocket expenses that the dcFSA didn't cover...

I'm pretty sure that financial writer is mistaken. If you find a tax preparer, CPA, enrolled agent who says the same thing, I'd be very interested in hearing it.

[MoseyingAlong]

Hmmm... This article by smart Asset says I should be able to do both....

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit

In their example, they said you can claim the credit with additional out of pocket expenses that the dcFSA didn't cover...

I'm pretty sure that financial writer is mistaken. If you find a tax preparer, CPA, enrolled agent who says the same thing, I'd be very interested in hearing it.

You may want to review IRS Pub 503.
https://www.irs.gov/pub/irs-pdf/p503.pdf

From page 13
Example 2. Randall is married and both he and his
wife are employed. Each has earned income in excess of
$6,000. They have two children, Anne and Andy, ages 2
and 4, who attend a daycare facility licensed and regula-
ted by the state. Randall's work-related expenses are
$6,000 for the year.
Randall's employer has a dependent care assistance
program as part of its cafeteria plan, which allows employ-
ees to make pre-tax contributions to a dependent care
flexible spending arrangement. Randall has elected to
take the maximum $5,000 exclusion from his salary to
cover dependent care expenses through this program.
Although the dollar limit for his work-related expenses
is $6,000 (two or more qualifying persons), Randall fig-
ures his credit on only $1,000 of the $6,000 work-related
expense paid. This is because his dollar limit is reduced
as shown next.
Randall's Reduced Dollar Limit
1) Maximum allowable expenses for two
qualifying persons . . . . . . . . . . . . . . . . . . . . . . $6,000
2) Minus: Dependent care benefits selected
from employer's cafeteria plan and
excluded from Randall's income . . . . . . . . . . . . . −5,000
3) Reduced dollar limit on work-related expenses
Randall can use for the credit . . . . . . . . . . . . . . . $1,000

[Psychstache]

Hmmm... This article by smart Asset says I should be able to do both....

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit

In their example, they said you can claim the credit with additional out of pocket expenses that the dcFSA didn't cover...

I'm pretty sure that financial writer is mistaken. If you find a tax preparer, CPA, enrolled agent who says the same thing, I'd be very interested in hearing it.

+1. Been interacting with this credit situation for years and it has always been the described in the post below:

Hmmm... This article by smart Asset says I should be able to do both....

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit

In their example, they said you can claim the credit with additional out of pocket expenses that the dcFSA didn't cover...

I'm pretty sure that financial writer is mistaken. If you find a tax preparer, CPA, enrolled agent who says the same thing, I'd be very interested in hearing it.

You may want to review IRS Pub 503.
https://www.irs.gov/pub/irs-pdf/p503.pdf

From page 13
Example 2. Randall is married and both he and his
wife are employed. Each has earned income in excess of
$6,000. They have two children, Anne and Andy, ages 2
and 4, who attend a daycare facility licensed and regula-
ted by the state. Randall's work-related expenses are
$6,000 for the year.
Randall's employer has a dependent care assistance
program as part of its cafeteria plan, which allows employ-
ees to make pre-tax contributions to a dependent care
flexible spending arrangement. Randall has elected to
take the maximum $5,000 exclusion from his salary to
cover dependent care expenses through this program.
Although the dollar limit for his work-related expenses
is $6,000 (two or more qualifying persons), Randall fig-
ures his credit on only $1,000 of the $6,000 work-related
expense paid. This is because his dollar limit is reduced
as shown next.
Randall's Reduced Dollar Limit
1) Maximum allowable expenses for two
qualifying persons . . . . . . . . . . . . . . . . . . . . . . $6,000
2) Minus: Dependent care benefits selected
from employer's cafeteria plan and
excluded from Randall's income . . . . . . . . . . . . . −5,000
3) Reduced dollar limit on work-related expenses
Randall can use for the credit . . . . . . . . . . . . . . . $1,000

[Mgmny]

Hmmm... This article by smart Asset says I should be able to do both....

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit

In their example, they said you can claim the credit with additional out of pocket expenses that the dcFSA didn't cover...

I'm pretty sure that financial writer is mistaken. If you find a tax preparer, CPA, enrolled agent who says the same thing, I'd be very interested in hearing it.

You may want to review IRS Pub 503.
https://www.irs.gov/pub/irs-pdf/p503.pdf

From page 13
Example 2. Randall is married and both he and his
wife are employed. Each has earned income in excess of
$6,000. They have two children, Anne and Andy, ages 2
and 4, who attend a daycare facility licensed and regula-
ted by the state. Randall's work-related expenses are
$6,000 for the year.
Randall's employer has a dependent care assistance
program as part of its cafeteria plan, which allows employ-
ees to make pre-tax contributions to a dependent care
flexible spending arrangement. Randall has elected to
take the maximum $5,000 exclusion from his salary to
cover dependent care expenses through this program.
Although the dollar limit for his work-related expenses
is $6,000 (two or more qualifying persons), Randall fig-
ures his credit on only $1,000 of the $6,000 work-related
expense paid. This is because his dollar limit is reduced
as shown next.
Randall's Reduced Dollar Limit
1) Maximum allowable expenses for two
qualifying persons . . . . . . . . . . . . . . . . . . . . . . $6,000
2) Minus: Dependent care benefits selected
from employer's cafeteria plan and
excluded from Randall's income . . . . . . . . . . . . . −5,000
3) Reduced dollar limit on work-related expenses
Randall can use for the credit . . . . . . . . . . . . . . . $1,000

Thanks, and sorry for belaboring this. Cash App Taxes is not going to budge, so they are agreeing with you too. The above example (which is the type of example i get from the IRS all the time) only shows $6000 in expenses, but i have $20,000. So their example fits neatly into their narrative of 5k for dcFSA and then 1k for allowed, but doesn't describe what you can do if you have more. I did more googling and found other sites saying you can only have up to 6,000 and you must reduce it by the $5,000 in dcFSA benefits first, so I'm sure you are right.

I'm sort of annoyed, because it essentially renders my dcFSA useless, and i already elected it again for 2023. It looks like my effective tax rate ends up being just a little below 20%, so i would be better off without the dcFSA, but I've already locked myself in for 2023.... sigh.

Thanks again for your help!

[Mgmny]

I'm pretty sure that financial writer is mistaken. If you find a tax preparer, CPA, enrolled agent who says the same thing, I'd be very interested in hearing it.

Yeah I'm sure you are right, i was just hoping/looking for a loophole i guess, as it would be worth $1000 for me! Thanks for your confirmation!

[charis]

Hmmm... This article by smart Asset says I should be able to do both....

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit

In their example, they said you can claim the credit with additional out of pocket expenses that the dcFSA didn't cover...

I'm pretty sure that financial writer is mistaken. If you find a tax preparer, CPA, enrolled agent who says the same thing, I'd be very interested in hearing it.

You may want to review IRS Pub 503.
https://www.irs.gov/pub/irs-pdf/p503.pdf

From page 13
Example 2. Randall is married and both he and his
wife are employed. Each has earned income in excess of
$6,000. They have two children, Anne and Andy, ages 2
and 4, who attend a daycare facility licensed and regula-
ted by the state. Randall's work-related expenses are
$6,000 for the year.
Randall's employer has a dependent care assistance
program as part of its cafeteria plan, which allows employ-
ees to make pre-tax contributions to a dependent care
flexible spending arrangement. Randall has elected to
take the maximum $5,000 exclusion from his salary to
cover dependent care expenses through this program.
Although the dollar limit for his work-related expenses
is $6,000 (two or more qualifying persons), Randall fig-
ures his credit on only $1,000 of the $6,000 work-related
expense paid. This is because his dollar limit is reduced
as shown next.
Randall's Reduced Dollar Limit
1) Maximum allowable expenses for two
qualifying persons . . . . . . . . . . . . . . . . . . . . . . $6,000
2) Minus: Dependent care benefits selected
from employer's cafeteria plan and
excluded from Randall's income . . . . . . . . . . . . . −5,000
3) Reduced dollar limit on work-related expenses
Randall can use for the credit . . . . . . . . . . . . . . . $1,000

Thanks, and sorry for belaboring this. Cash App Taxes is not going to budge, so they are agreeing with you too. The above example (which is the type of example i get from the IRS all the time) only shows $6000 in expenses, but i have $20,000. So their example fits neatly into their narrative of 5k for dcFSA and then 1k for allowed, but doesn't describe what you can do if you have more. I did more googling and found other sites saying you can only have up to 6,000 and you must reduce it by the $5,000 in dcFSA benefits first, so I'm sure you are right.

I'm sort of annoyed, because it essentially renders my dcFSA useless, and i already elected it again for 2023. It looks like my effective tax rate ends up being just a little below 20%, so i would be better off without the dcFSA, but I've already locked myself in for 2023.... sigh.

Thanks again for your help!

Can you explain why the DCFSA is useless in your case?  I can confirm that the one year we had over 5k in child care costs, the tax credit kicked in only for the amount over 5k in our DCFSA.

[Psychstache]

Hmmm... This article by smart Asset says I should be able to do both....

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit

In their example, they said you can claim the credit with additional out of pocket expenses that the dcFSA didn't cover...

I'm pretty sure that financial writer is mistaken. If you find a tax preparer, CPA, enrolled agent who says the same thing, I'd be very interested in hearing it.

You may want to review IRS Pub 503.
https://www.irs.gov/pub/irs-pdf/p503.pdf

From page 13
Example 2. Randall is married and both he and his
wife are employed. Each has earned income in excess of
$6,000. They have two children, Anne and Andy, ages 2
and 4, who attend a daycare facility licensed and regula-
ted by the state. Randall's work-related expenses are
$6,000 for the year.
Randall's employer has a dependent care assistance
program as part of its cafeteria plan, which allows employ-
ees to make pre-tax contributions to a dependent care
flexible spending arrangement. Randall has elected to
take the maximum $5,000 exclusion from his salary to
cover dependent care expenses through this program.
Although the dollar limit for his work-related expenses
is $6,000 (two or more qualifying persons), Randall fig-
ures his credit on only $1,000 of the $6,000 work-related
expense paid. This is because his dollar limit is reduced
as shown next.
Randall's Reduced Dollar Limit
1) Maximum allowable expenses for two
qualifying persons . . . . . . . . . . . . . . . . . . . . . . $6,000
2) Minus: Dependent care benefits selected
from employer's cafeteria plan and
excluded from Randall's income . . . . . . . . . . . . . −5,000
3) Reduced dollar limit on work-related expenses
Randall can use for the credit . . . . . . . . . . . . . . . $1,000

Thanks, and sorry for belaboring this. Cash App Taxes is not going to budge, so they are agreeing with you too. The above example (which is the type of example i get from the IRS all the time) only shows $6000 in expenses, but i have $20,000. So their example fits neatly into their narrative of 5k for dcFSA and then 1k for allowed, but doesn't describe what you can do if you have more. I did more googling and found other sites saying you can only have up to 6,000 and you must reduce it by the $5,000 in dcFSA benefits first, so I'm sure you are right.

I'm sort of annoyed, because it essentially renders my dcFSA useless, and i already elected it again for 2023. It looks like my effective tax rate ends up being just a little below 20%, so i would be better off without the dcFSA, but I've already locked myself in for 2023.... sigh.

Thanks again for your help!

Because the credit doesn't care about the total you have. I was in the same boat as you with only one kiddo but spending close to $20k. I would plug in $20k in the form, then it gets reduced to the maximum allowable ($3k), then it drops to 0 when lined up against the DCFSA. With 2 kids, you can have $5k in expenses or $50k in expenses, it doesn't matter.

I stopped doing the DCFSA since I rank it as the lowest option of tax advantaged space, and I had other tax advantaged options that I wasn't filling up that put the $5k to better use.

[Mgmny]

Can you explain why the DCFSA is useless in your case?  I can confirm that the one year we had over 5k in child care costs, the tax credit kicked in only for the amount over 5k in our DCFSA.

It's possible I'm not thinking of this correctly, but the $6,000 that we can talk about here could be worth $1200 to me as a tax credit (6,000 * 20%). However, because i had the dcFSA, it shielded me from $5,000 of taxable income. According to my current filing, i have an effective tax rate of 16.6% (calculated taxes owed of 27k on a taxable income of 164k). So, the dcFSA "saved" me $830 ($5000 max in dcFSA x effective tax rate of 0.16), plus i can take advantage of the last 1000 of eligible expenses in the 6000 max (6000 max minus 5000 from the dcFSA) at 20%, or another $200.

So, the dcFSA saved me $830 in taxes and allowed me to get a max of $200 in credits, for a total of $1030. If i wouldn't have used the dcFSA, i would have gotten $1200 in credits - or about $200 more than i saved using the dcFSA method.

Am I thinking about this correctly?

[Psychstache]

Can you explain why the DCFSA is useless in your case?  I can confirm that the one year we had over 5k in child care costs, the tax credit kicked in only for the amount over 5k in our DCFSA.

It's possible I'm not thinking of this correctly, but the $6,000 that we can talk about here could be worth $1200 to me as a tax credit (6,000 * 20%). However, because i had the dcFSA, it shielded me from $5,000 of taxable income. According to my current filing, i have an effective tax rate of 16.6% (calculated taxes owed of 27k on a taxable income of 164k). So, the dcFSA "saved" me $830 ($5000 max in dcFSA x effective tax rate of 0.16), plus i can take advantage of the last 1000 of eligible expenses in the 6000 max (6000 max minus 5000 from the dcFSA) at 20%, or another $200.

So, the dcFSA saved me $830 in taxes and allowed me to get a max of $200 in credits, for a total of $1030. If i wouldn't have used the dcFSA, i would have gotten $1200 in credits - or about $200 more than i saved using the dcFSA method.

Am I thinking about this correctly?

This is a slight miscalculation. The $5k in reduced taxable income should be calculated at your top bracket, not your effective rate. Example:

Lets pretend that your taxable income is $100k and you are MFJ.

You fund the DCFSA. Taxable Income drops to $95k, saving you $1100 (top bracket of 22% x $5000), plus you use the last $1000 from the credit at 20% for another $200. Grand total reduction in your tax bill of $1300 vs $1200 in just doing the credit.

So whether or not DCFSA is a benefit vs just straight using the credit is a function of where your last dollars are taxed.

[Mgmny]

Can you explain why the DCFSA is useless in your case?  I can confirm that the one year we had over 5k in child care costs, the tax credit kicked in only for the amount over 5k in our DCFSA.

It's possible I'm not thinking of this correctly, but the $6,000 that we can talk about here could be worth $1200 to me as a tax credit (6,000 * 20%). However, because i had the dcFSA, it shielded me from $5,000 of taxable income. According to my current filing, i have an effective tax rate of 16.6% (calculated taxes owed of 27k on a taxable income of 164k). So, the dcFSA "saved" me $830 ($5000 max in dcFSA x effective tax rate of 0.16), plus i can take advantage of the last 1000 of eligible expenses in the 6000 max (6000 max minus 5000 from the dcFSA) at 20%, or another $200.

So, the dcFSA saved me $830 in taxes and allowed me to get a max of $200 in credits, for a total of $1030. If i wouldn't have used the dcFSA, i would have gotten $1200 in credits - or about $200 more than i saved using the dcFSA method.

Am I thinking about this correctly?

This is a slight miscalculation. The $5k in reduced taxable income should be calculated at your top bracket, not your effective rate. Example:

Lets pretend that your taxable income is $100k and you are MFJ.

You fund the DCFSA. Taxable Income drops to $95k, saving you $1100 (top bracket of 22% x $5000), plus you use the last $1000 from the credit at 20% for another $200. Grand total reduction in your tax bill of $1300 vs $1200 in just doing the credit.

So whether or not DCFSA is a benefit vs just straight using the credit is a function of where your last dollars are taxed.

Ah! Good point, i was forget it should be taken off the marginal on the top. Thank you!

[charis]

Can you explain why the DCFSA is useless in your case?  I can confirm that the one year we had over 5k in child care costs, the tax credit kicked in only for the amount over 5k in our DCFSA.

It's possible I'm not thinking of this correctly, but the $6,000 that we can talk about here could be worth $1200 to me as a tax credit (6,000 * 20%). However, because i had the dcFSA, it shielded me from $5,000 of taxable income. According to my current filing, i have an effective tax rate of 16.6% (calculated taxes owed of 27k on a taxable income of 164k). So, the dcFSA "saved" me $830 ($5000 max in dcFSA x effective tax rate of 0.16), plus i can take advantage of the last 1000 of eligible expenses in the 6000 max (6000 max minus 5000 from the dcFSA) at 20%, or another $200.

So, the dcFSA saved me $830 in taxes and allowed me to get a max of $200 in credits, for a total of $1030. If i wouldn't have used the dcFSA, i would have gotten $1200 in credits - or about $200 more than i saved using the dcFSA method.

Am I thinking about this correctly?

This is a slight miscalculation. The $5k in reduced taxable income should be calculated at your top bracket, not your effective rate. Example:

Lets pretend that your taxable income is $100k and you are MFJ.

You fund the DCFSA. Taxable Income drops to $95k, saving you $1100 (top bracket of 22% x $5000), plus you use the last $1000 from the credit at 20% for another $200. Grand total reduction in your tax bill of $1300 vs $1200 in just doing the credit.

So whether or not DCFSA is a benefit vs just straight using the credit is a function of where your last dollars are taxed.

Ah! Good point, i was forget it should be taken off the marginal on the top. Thank you!

That was very helpful, thanks!