Dependent Care Benefits

[Burke]

I have a new client whose W2 shows dependent care benefits on Line 10. There is no child care deduction since wife does not work. Can you have these deducted from salary under a 125 plan if there is no tax deduction allowed on the return?

[S T]

Wife

Is the wife a "student" or "disabled"?


Sandy

[Lion]

Yes, but

Yes, but they will get added back into wages on the tax return unless there's more to your story.

[Burke]

That's what I thought too. Am interviewing further for details. Wife is not student or disabled. Since EIC involved, am digging much deeper. Last year HRB did return, had dep care bene on page 2 of Form 2441, but shows no expenses, and carryover of benefit.

[FEDUKE404]

Why take payroll deduction in the first place?

That's what I thought too. Am interviewing further for details. Wife is not student or disabled. Since EIC involved, am digging much deeper. Last year HRB did return, had dep care bene on page 2 of Form 2441, but shows no expenses, and carryover of benefit.

I don't follow the logic here - why would husband take out DCB from his wages (other than to save taxes???) if there were no allowable expenses in the first place?? Side question: Does employer not have to ask at least some rudimentary questions to allow such?

The unused benefits from box 10 of Form W2 will eventually work themselves back into additional income on line 7 of Form 1040, with that little tag "DCB" attached. As for the Form 2441 that Block prepared, that might have fired up automatically as a result of the box 10 entry on the W2 just to show the calculations ("taxable benefits") for the added income that goes to Form 1040.

FE

[outwest]

The employer..

I don't follow the logic here - why would husband take out DCB from his wages (other than to save taxes???) if there were no allowable expenses in the first place?? Side question: Does employer not have to ask at least some rudimentary questions to allow such?

FE

On the side question: The employer is under no obligation to police how much the employee wishes to set aside as long as it's under the statutory limit. That gets the money out of the paycheck and into the fund for reimbursement.

Now, the employee submits receipts for reimbursement to the DCB plan. Limiting reimbursement to the receipts is all the plan must do.

Which brings up a point: a printout of the DCB plan ledger for the employee can give you some of the documentation of the amounts spent for the 2441. At least to the extent receipts were turned in.

It's pretty common for employees to turn in the receipts and not keep a copy or summary for their taxes.

[tpnl]

Begin to roll your eyes

My sister-in-law says her employer does not require documentation when she takes money out of her dep care plan. (I know, we hate to hear "But my boyfirends, mothers, cousin, . . . ")

But, I do her taxes, and she always provides me with report from daycare with federal ID number.

[FEDUKE404]

No reporting? - unlikely!

My sister-in-law says her employer does not require documentation when she takes money out of her dep care plan. (I know, we hate to hear "But my boyfirends, mothers, cousin, . . . ")

But, I do her taxes, and she always provides me with report from daycare with federal ID number.

I find that VERY hard to believe. All administrators that handle DCB disbursements usually have very detailed forms to fill out, to include name(s)/DOB of dependent, dollar amount paid, when it was paid, and what time period the costs covered. (I do not recall if they require the care provider's tax stuff or not.) They would also require a copy of proof of payment to the day care facility.

I went through all this with two dependents of my own........

The whole idea here is that whatever expenses get to be claimed on Form 2441 have to be reduced by DCB paid out.....you can't deduct them twice (#1 being on the W2, Box 10)!!

FE

[Burke]

I don't follow the logic here - why would husband take out DCB from his wages (other than to save taxes???) if there were no allowable expenses in the first place?? Side question: Does employer not have to ask at least some rudimentary questions to allow such?FE

That is exactly why I am questioning this. It does not make sense. There may be child care expenses, but wife does not work, so there is no deduction on the tax return for them. Doesn't need them anyway. Income not suffficient to pay tax. I don't know of any employer that requires the employee to submit their tax return to them -- they just put the figure on the W-2 and all I have had experience with require documentation for the child care expense. But this has the net result of reducing Box 1, 3 & 5 to a lower amount, and they qualify for more EIC. In addition, there are 401k contributions which also reduce Box 1 (and Line 7) resulting in more EIC. However, it appears that since CC benefits are more than the amount that can be excluded from income, those will add back to line 7 as wages. However, he has still saved the FICA/MC taxes on them. Neat trick. And all legal.