Dependent Care Benefits

[Rlmea]

Are both parents (MFJ, each with earned income, 2 children in daycare), eligible to participate in each of their employer's FSA plan for dependent care benefits to exclude $10,000 from federal tax? Naturally they spend much more than that for the 2 young children's daycare expenses.

Robin

[S T]

Maximum

I believe the maximum per household would be $ 5,000

The dependent care FSA is federally capped at $5,000 per year. While married spouses can each elect to have this amount deducted from their paycheck and applied to expenses, at tax time all withdrawals in excess of $5,000 are taxed. Unmarried couples can each deduct and use $5,000. However, these expenses are subject to the "qualifying child" rules, which usually means unmarried couples cannot pay expenses for the same child.

From Conexis

How much can I allocate to my dependent care FSA?
Your election may not exceed the maximum amount specified in Section 129 of the Internal Revenue Code. Currently, the maximum annual amount is $5,000 per year ($2,500 if you are married and file separate returns). Your maximum allocation may not exceed the earned income limitation. If you are single, the earned income limitation is your salary (excluding your contributions to the plan). If you are married, the earned income limitation is the lesser of your salary (excluding your contributions to the plan) or your spouse's salary.
What if my spouse participates in a dependent care FSA?
Can we both elect up to $5,000?
If you are married and file a joint tax return, the maximum amount you may exclude is $5,000. In other words, you and your spouse may not each claim $5,000. The maximum amount available if you are married but filing separate returns is $2,500. Please note you may not "double-dip" expenses (e.g., expenses reimbursed under your dependent care FSA may not be reimbursed under your spouse's dependent care FSA and vice versa).

If you "google" FSA Maximum Dependent Care Benefits - you will find more links from all of the FSA Benefit Providers and then also you can review Sect 129.

Sandy

[Rlmea]

Thanks Sandy,

I thought that might be the case. It's a shame because the daycare expenses are much larger than alot of mortgage payments anymore!

Robin

[FEDUKE404]

Max of $5k applies regardless

I can't answer whether the parents "could" both have the maximum of $5k withheld from their employer accounts, but the point is pretty well moot after working through line 23 of Form 2441.

Assuming the software is up to speed, and the information from Box 10 of the Form W2 was entered properly, any disallowed expenses (all above the $5k limit) will be added to the Form 1040 line 7 wages with the infamous "DCB" addition.

FE

[Bartman]

FICA Savings

If spouses both elect the $5,000 dep care reduction, aren't FICA tax savings realized since the add back on the 2441 only adds back to gross taxable income? Correct me if I'm wrong, but that is how I've seen this issue run through a return.

[Bill Tubbs]

Yep!

If spouses both elect the $5,000 dep care reduction, aren't FICA tax savings realized since the add back on the 2441 only adds back to gross taxable income? Correct me if I'm wrong, but that is how I've seen this issue run through a return.

Exactly correct!

[FEDUKE404]

Extra DCA might be indirect tax saving

If spouses both elect the $5,000 dep care reduction, aren't FICA tax savings realized since the add back on the 2441 only adds back to gross taxable income? Correct me if I'm wrong, but that is how I've seen this issue run through a return.

In theory you are correct, assuming that such an arrangement is allowable in the first place. (I've made a couple of unsuccesful inquiries related to whether 2x $5k plans can actually be put into effect.)

It's interesting that in most cases the DCA program caveats are what you might lose by having "lower" Soc Sec wages, which of course for just about everyone is a moot point due to the sorry state of Soc Sec. Would someone in their 30's really expect any future negative aspect? I seriously doubt it!

So you have the flip side of the argument, which for all intents and purposes allows the couple to indirectly "save" the FICA/Med taxes on $5k of additional family earnings. Sounds like an easy $380/year or so for the plucking, or much less if the employee already happens to exceed the FICA base for the current year.

Might not be a bad idea after all.....the only downside I could see is the "unexpected" $5k of income on the final tax return might create problems with the total taxes already withheld on the "lower" wages.

It's been a while since I dealt with the "employee" portion of these plans, but is there not some limitations of total "sheltered" income that could conceivably be a factor for limiting 401(k) and/or cafeteria plan contributions?

FE

[Bartman]

Good Point

Good point FE