Dependent Care On Line 10 Of W-2

[dyne]

Is it beneficial to have your employer enter up to $5,000 in item 10 for Dependent Care Benefits? This amount is NOT being subtracted from the total wages reported in item 1 of the W-2 for my client so it would NOT decrease the clients income so as to affect the medical deduction or the taxable portion of social security benefits. I entered $5,000 as child care expense for one child in a test return and a $2019 refund resulted. I entered $5,000 in the computer as having been reflected in line 10 of the W-2 and the refund was $1419, a DECREASE of $600 in the refund. It might be differant if TWO children qualified for the dependent care credit. I have long wondered if it was better to have the $5,000 dependent care allocation made. Now it appears that it may not be better but may actually be worse. I thought the $5,000 was supposed to be subtracted in arriving at the wages to be reported in item 1 of the W-2. What am I doing wrong? Comments will be appreciated.

[appelman]

You need to complete Form 2441.

Remember to read the instructions and to complete Part III before Part II. There are a couple of limitations that come into play. The amount of child care expense offset against the benefit is limited to 3K for one child and 6K for two or more. For marrieds, another limit is the income of the lower-income spouse. Any benefit amount that exceeds the (limited) expenses will be added to Box 1 wages by your software. Only if the (limited) expenses exceed the benefit will the taxpayer be eligible for a child care credit.

[RitaB]

Depends

Is it beneficial to have your employer enter up to $5,000 in item 10 for Dependent Care Benefits... I thought the $5,000 was supposed to be subtracted in arriving at the wages to be reported in item 1 of the W-2. What am I doing wrong? Comments will be appreciated.

You are correct; the DCB should NOT be in Box 1.

That would save most people I know 15% of the DCB. On the other hand, I see a lot of 20% of the expense credits on Form 2441 for those who can't or don't have the option for the employer to deduct DCB pre-tax.

I think it's covered in Pub 503. If you go overboard on the pre-tax amount, you just add what you didn't spend for care to line 7 of the 1040. Flows from Form 2441.

I hope I didn't mess that up.

[David1980]

If the amount is included in box 1, the taxpayer should try to get a corrected W-2 from the employer. Only amounts over $5,000 are to be included in box 1. See Pub 15-B page 9.

How do you know it's being included in box 1 anyway?

As far as whether it's better to use dependent care benefits on W-2 or claim credit, that depends. If you're in the income range where you can get a 35% credit (and have the tax liability to make use of it) obviously you'll be better off with the credit. If you are in a 20% credit and your marginal tax rate is > 20%, then the income exclusion is better.

[Possi]

RitaB

I'm straight up stealin' your quote. You'll find in in my FB "status" bar!

[dyne]

Thank you all. If I start with the social security wages and subtract the contribution to
his 401(k) plan the balance is the amount reported in item 1 of the W-2, so the $5,000
reported in item 10 was clearly NOT subtracted. I have asked the client to reguest an
amended W-2 form. Best wishes.

[BP.]

If I start with the social security wages and subtract the contribution to
his 401(k) plan the balance is the amount reported in item 1 of the W-2

It should be, as DCBs in box 10 are excluded from SS & Medicare wage boxes, too.

[RitaB]

I had forgotten that

It should be, as DCBs in box 10 are excluded from SS & Medicare wage boxes, too.

Yeah, so it saves most of my folks 28% in 2011.

[Gary2]

For lower income people, it's sometimes better to skip the DCB and take the credit.