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Dependent Care FSA and benefits

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Level 2

My understanding is that if you contribute to a dependent care FSA (is that the same as DCAP?) it will appear in Box 10 of your W2. The rules state that a married filing separate spouse can only contribute $2500. She did, and it appeared in Box 10. However, as MFS and the couple lived together, she cannot file Form 2441 to take the child care credit. Therefore, the amount in Box 10 becomes taxable income. Am I missing something? So what is the benefit at all, and why do they allow MFS spouses to contribute when they cannot benefit? Unless I'm missing something. Thanks in advance.

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Level 12

DCAP basically is FSA spending not on yourself. That is pre-tax dollars.

The Child/Dependent Care Credit is a Credit, so it gives a better dollar-for-dollar impact.

And you have to examine income and qualifications and number of children/dependents, to answer why one or the other but not both. And yes, filing status matters; married filing joint is required for the credit.

I found some resources for you:

https://turbotax.intuit.com/tax-tips/family/the-ins-and-outs-of-the-child-and-dependent-care-tax-cre...

https://www.benefitresource.com/blog/dependent-care-fsa-or-child-and-dependent-care-tax-credit/

"and why do they allow MFS spouses to contribute when they cannot benefit?"

There is benefit; you just need to use the better option, depending on facts and circumstances.

 

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Level 2

Thanks for the reply. I figured it out and want to relay this here in case anyone else has the same question. Basically, it appeared to me that, while the employer excludes your FSA contributions from taxation, the amount is then placed in Box 10. In order to exclude that amount in Box 10 from being taxed, you'd have to have child care expenses and fill out Form 2441. My confusion lay in the knowledge that an MFS individual generally cannot take the credit, and to me that meant not filing 2441, and so making the amount in Box 10, which was originally excluded from tax, taxable, negating the benefit. That basically was my question. I did not realize until just now that an MFS fills out page 2 to take the exclusion. They just cannot take the credit from page 1. More than a little complicated. Who sits around thinking these things up?

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Level 12

The FSA amount considered a reimbursement. If you had no expense, then it is taxable to you, because you got money. The Box 10 amount is directly or indirectly paid for expense incurred. Otherwise, you paid (or they paid on your behalf) child/dependent costs with pre-tax money; that is the Benefit.

The Tax Credit is a different function entirely.

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