Midyear FSA Changes and Child and Dependent Care Tax Credit

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Topic Author
quasihyperbolic
Posts: 4
Joined: Tue Apr 06, 2021 1:38 pm

Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by quasihyperbolic »

Long-time reader, first time poster here. Given the increased generosity in the Child and Dependent Care Tax Credit, my spouse and I would be much better off taking the CDCTC than contributing to a Childcare FSA. This is the situation:

MFJ
One qualifying dependent
MTR (FSA contribution doesn't move us to lower tax bracket): 25.65%
Childcare costs >$10,500
Set Childcare FSA contributions to $5000 at beginning of the year
Employer allows for mid-year changes in FSA as a result of American Rescue Plan changes, but does not refund contributions already made. Contributions already made could get carried over to next year.

If we opt out of the Childcare FSA now, can we still take advantage of the expanded CDCTC? Or does the original contribution to the Childcare FSA make us ineligible?
oldfatguy
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Joined: Tue Feb 27, 2018 1:38 pm

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by oldfatguy »

There is current thread on this very topic: viewtopic.php?f=2&t=342765
Topic Author
quasihyperbolic
Posts: 4
Joined: Tue Apr 06, 2021 1:38 pm

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by quasihyperbolic »

Yes, I did see that but that one seems focused on which scenario is more beneficial. In this case, I'm certain what the "correct" choice is but I was wondering about the tax mechanics of whether the adjustment would even be possible.

My apologies if I should have just added my question there!
oldfatguy
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Joined: Tue Feb 27, 2018 1:38 pm

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by oldfatguy »

If you don't take any reimbursements from the FSA account this year, and your employer allows you to carry them forward, then you would record that on Part III of Form 2441, and it gets added back to your taxable income. I don't see any reason that you couldn't opt to take the CDCTC instead.
Topic Author
quasihyperbolic
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Joined: Tue Apr 06, 2021 1:38 pm

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by quasihyperbolic »

That's extremely helpful, thank you so much!
nickpete123
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Joined: Mon Oct 09, 2017 7:19 am

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by nickpete123 »

oldfatguy wrote: Tue Apr 06, 2021 2:39 pm If you don't take any reimbursements from the FSA account this year, and your employer allows you to carry them forward, then you would record that on Part III of Form 2441, and it gets added back to your taxable income. I don't see any reason that you couldn't opt to take the CDCTC instead.
I believe what you are saying applies to me but I was hoping someone could confirm.

MFJ
2 Dependents
$20,000 in 2020 Eligible expenses
Estimated 2020 AGI of ~125k (before DCA contribution)
Currently contributing a total of $5,000 to DCFSA but can stop contributions and carryover remaining balance.

Am I correct in thinking I could keep contributing ($1,250 already contributed & used) the remaining $3,750 but instead of using it in 2020 carryover the $3,750 to 2021, while then just elected to use the CDCTC of:
$16,000 (full amount eligible) - $1,250 (amount contributed AND used in 2020)= $14,750 x .50 = 7,375 in CDCTC?

Or would the fact that I contributed the full $5k to a DCFSA in 2020 reduce my $16,000 to $11,000 eligible for CDCTC?

Thank you for any light! I'm starting to wonder if all this headache is worth the potential payoff but seems like a win if possible!
oldfatguy
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Joined: Tue Feb 27, 2018 1:38 pm

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by oldfatguy »

nickpete123 wrote: Tue Apr 06, 2021 3:33 pm
Am I correct in thinking I could keep contributing ($1,250 already contributed & used) the remaining $3,750 but instead of using it in 2020 carryover the $3,750 to 2021, while then just elected to use the CDCTC of:
$16,000 (full amount eligible) - $1,250 (amount contributed AND used in 2020)= $14,750 x .50 = 7,375 in CDCTC?
I'm a little confused by the dates, but maybe you meant to refer to 2021 and 2022?

Assuming that the form will work the same way next year, I would run through several scenarios with Form 2441 (using the higher amounts for 2021), so that you can see what will happen. https://www.irs.gov/pub/irs-pdf/f2441.pdf
Beachey
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Joined: Wed Sep 02, 2020 9:54 am

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by Beachey »

oldfatguy wrote: Tue Apr 06, 2021 2:39 pm If you don't take any reimbursements from the FSA account this year, and your employer allows you to carry them forward, then you would record that on Part III of Form 2441, and it gets added back to your taxable income. I don't see any reason that you couldn't opt to take the CDCTC instead.
This is a good suggestion and given the rules of the forum, the current tax law does revert so this would likely save you the most money as the law stands. Worth considering if the changes are extended into 2022 and beyond and does that change the answer?

Why you might want to cancel your contribution this year to minimize the amount you would have to carry over if there is further legislation.
nickpete123
Posts: 12
Joined: Mon Oct 09, 2017 7:19 am

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by nickpete123 »

oldfatguy wrote: Tue Apr 06, 2021 4:07 pm
nickpete123 wrote: Tue Apr 06, 2021 3:33 pm
Am I correct in thinking I could keep contributing ($1,250 already contributed & used) the remaining $3,750 but instead of using it in 2020 carryover the $3,750 to 2021, while then just elected to use the CDCTC of:
$16,000 (full amount eligible) - $1,250 (amount contributed AND used in 2020)= $14,750 x .50 = 7,375 in CDCTC?
I'm a little confused by the dates, but maybe you meant to refer to 2021 and 2022?

Assuming that the form will work the same way next year, I would run through several scenarios with Form 2441 (using the higher amounts for 2021), so that you can see what will happen. https://www.irs.gov/pub/irs-pdf/f2441.pdf
Oops! Yes I meant 2021 and 2022.
Topic Author
quasihyperbolic
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Joined: Tue Apr 06, 2021 1:38 pm

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by quasihyperbolic »

Beachey wrote: Tue Apr 06, 2021 4:34 pm
oldfatguy wrote: Tue Apr 06, 2021 2:39 pm If you don't take any reimbursements from the FSA account this year, and your employer allows you to carry them forward, then you would record that on Part III of Form 2441, and it gets added back to your taxable income. I don't see any reason that you couldn't opt to take the CDCTC instead.
This is a good suggestion and given the rules of the forum, the current tax law does revert so this would likely save you the most money as the law stands. Worth considering if the changes are extended into 2022 and beyond and does that change the answer?

Why you might want to cancel your contribution this year to minimize the amount you would have to carry over if there is further legislation.
Yes, since this year's contributions would just crowd out next year's contributions (assuming current law holds), I think it's entirely optimal to stop contributing to the FSA this year, take the CDCTC for the 2021 tax year, and then resume contributing to the FSA next year. That also leaves some flexibility in case the CDCTC expansion gets extended. Or were you referring to something else?
CorradoJr
Posts: 165
Joined: Thu Apr 26, 2012 10:03 am

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by CorradoJr »

What is the 2021 AGI phase-out for the Child and Dependent Care Tax Credit?

When I went through this topic in TurboTax for 2020, it had me answer a lot of questions and I believe generated a 2441 form, but at the end it said I was not eligible.
Beachey
Posts: 87
Joined: Wed Sep 02, 2020 9:54 am

Re: Midyear FSA Changes and Child and Dependent Care Tax Credit

Post by Beachey »

quasihyperbolic wrote: Wed Apr 07, 2021 11:42 am
Beachey wrote: Tue Apr 06, 2021 4:34 pm
oldfatguy wrote: Tue Apr 06, 2021 2:39 pm If you don't take any reimbursements from the FSA account this year, and your employer allows you to carry them forward, then you would record that on Part III of Form 2441, and it gets added back to your taxable income. I don't see any reason that you couldn't opt to take the CDCTC instead.
This is a good suggestion and given the rules of the forum, the current tax law does revert so this would likely save you the most money as the law stands. Worth considering if the changes are extended into 2022 and beyond and does that change the answer?

Why you might want to cancel your contribution this year to minimize the amount you would have to carry over if there is further legislation.
Yes, since this year's contributions would just crowd out next year's contributions (assuming current law holds), I think it's entirely optimal to stop contributing to the FSA this year, take the CDCTC for the 2021 tax year, and then resume contributing to the FSA next year. That also leaves some flexibility in case the CDCTC expansion gets extended. Or were you referring to something else?
Yes, you understand. Under current law, in 2022 you are better off contributing $5000 to a DCFSA as you will be limited to $3000 in Child Tax Care Credit with one dependent. Even if you rollover money to next year you are over either way. However, if that limit is also increased to $8000 for one child in 2022 with the enhanced phaseout you likely will not want to contribute to a DCFSA again but whatever you rollover will count against the $8000 in 2022. This is speculation on my part but it would appear to stopping contributions in 2021 is the best hedge against what may happen in the future.
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