Dependent Care FSA and/or Child Care Tax Credit

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deltaneutral83
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Dependent Care FSA and/or Child Care Tax Credit

Post by deltaneutral83 »

I've read some articles but need some clarification on both of these (it seems you can use both, but just that they don't stack). If after having first child now, spouse returns after leave later this year, will spouse have the opportunity to fill up the 2021 bucket for Employer FSA for child care from regular pay check, which is increased due to Covid? In addition, I've seen potentially it is within the employers discretion to roll over any unused FSA for dependent care monies from 2021 to 2022 from the recent Covid bill (however, don't know if this is for children already born before the legislation was passed just recently or children born anytime in 2021)?

Hypothetically, if above is accurate, and child care annually is greater than the ($15,500 from 2021 and 2022 limits), would it make sense to capture the Child Care tax credit of $600 (20% of $3,000 = $600 for one child) for the last few months of 2021, and then tap the $10,500 for remainder of 2021, then use what's left by rolling over 2021 balance to to 2022, and then maxing out the 2022 FSA amount of $5,500 and using that until used up in 2022, and then if we spend an additional $3,000 at the end of 2022 capture as much of the $600 dependent child care credit as possible? Obviously just trying to be as tax efficient as possible.
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FiveK
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by FiveK »

There are some law changes specific to 2021.

Whether the FSA or the credit is better for you may depend on how your marginal tax rate saved by the FSA compares with the fraction of expense allowed for the credit. The latter is also income-dependent.

There may be a difference between what the IRS allows your employer to offer you, vs. what your employer chooses to offer.

I know the 2021 version of the personal finance toolbox has the 2021 law changes, so you could enter your situation there to see what (within the constraints your employer and the IRS allow) will be better for you. Don't know if any of the other estimation tools have also included those changes (e.g., the "mortgagecalculator" one does not calculate the credit for you).
Jjsfr
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by Jjsfr »

I thought the dependent care credit went to expenses up to 8,000/16,000 for one/multiple this year. The 3000 is the child tax credit.

For your AGI you would need to calculate whether it makes sense to do the FSA or tax the expanded 2021 credit.

One of the things that comes to mind about DCFSA is that whole yes you can load it up to 10,500 this year, if your QLE is the birth it can only be for expenses after that date. However the dependent care work sheet -- I think -- factors in the total DCFSA contribution for 2021 regardless of the date, so the total amount of credit "might" be your expenses - fsa contribution. However any unused fsa contributions can be rolled over to 2021 and used there.

For factoring whether DCFSA or tax credit is better for you, remember even if you qualify for 50% credit rate it is on post tax dollars. I think the magic number is under 33% tax rate (inc FICA) for the credit to be worth more than the FSA.
Last edited by Jjsfr on Mon Jul 19, 2021 8:38 pm, edited 2 times in total.
Topic Author
deltaneutral83
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by deltaneutral83 »

Jjsfr wrote: Mon Jul 19, 2021 8:24 pm I thought the dependent care credit went to expenses up to 8,000/16,000 for one/multiple this year. The 3000 is the child tax credit.

For your AGI you would need to calculate whether it makes sense to do the FSA or tax the expanded 2021 credit.

One of the things that comes to mind about DCFSA is that whole yes you can load it up to 10,500 this year, if your QLE is the birth it can only be for expenses after that date. However the dependent care work sheet -- I think -- factors in the total DCFSA contribution for 2021 regardless of the date, so the total amount of credit "might" be your expenses - fsa contribution. However any unused fsa contributions can be rolled over to 2021 and used there.

For factoring whether DCFSA or tax credit is better for you, remember even if you qualify for 50% credit rate it is on post tax dollars. I think the magic number is under 33% tax rate (inc FICA) for the credit to be worth more than the FSA.
Thanks, I see the dependent care credit is raised to $8,000/$16,000 and new AGI limits and corresponding %'s for 2021(with ambiguous language as to 2022 limits as to both DCFSA and DC credit?). Assuming it makes sense for a new birth/only child in 2021 to use whatever is in the DCFSA for 2022, I'm wondering if the DC tax credit for the remaining months of 2021 and (assuming employer let's DCFSA rollover to 2022) using the DCFSA limits for 2021 via rollover and whatever 2022 limit is to spend in 2022 (assume child care is beyond both 2021 and 2022 limits), basically child care in 2022 will cost more than 2021 and 2022 DCFSA limits (as it stands now) so trying to roll over the entirety of 2021 to 2022.
Last edited by deltaneutral83 on Tue Jul 20, 2021 8:50 am, edited 1 time in total.
JWalterWeatherman
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by JWalterWeatherman »

There actually was an article at WCI about this topic yesterday/today that you might find helpful- https://www.whitecoatinvestor.com/dcfsa ... x-credits/
deltaneutral83 wrote: Mon Jul 19, 2021 2:41 pm after having first child now, spouse returns after leave later this year, will spouse have the opportunity to fill up the 2021 bucket for Employer FSA for child care from regular pay check, which is increased due to Covid? In addition, I've seen potentially it is within the employers discretion to roll over any unused FSA for dependent care monies from 2021 to 2022 from the recent Covid bill (however, don't know if this is for children already born before the legislation was passed just recently or children born anytime in 2021)?
I think this is accurate that you will be able to fill up the 2021 bucket, but you might want to call the employer benefits team to ask. I think the key is that the expense has to occur after the account is opened (if it is a new account). I think it just needs to be a qualifying expense, so it doesn't matter if its a new child or an old child or what. I'm not sure about roll-overs from 2021 to 2022.
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deltaneutral83
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by deltaneutral83 »

JWalterWeatherman wrote: Tue Jul 20, 2021 8:36 am There actually was an article at WCI about this topic yesterday/today that you might find helpful- https://www.whitecoatinvestor.com/dcfsa ... x-credits/
deltaneutral83 wrote: Mon Jul 19, 2021 2:41 pm after having first child now, spouse returns after leave later this year, will spouse have the opportunity to fill up the 2021 bucket for Employer FSA for child care from regular pay check, which is increased due to Covid? In addition, I've seen potentially it is within the employers discretion to roll over any unused FSA for dependent care monies from 2021 to 2022 from the recent Covid bill (however, don't know if this is for children already born before the legislation was passed just recently or children born anytime in 2021)?
I think this is accurate that you will be able to fill up the 2021 bucket, but you might want to call the employer benefits team to ask. I think the key is that the expense has to occur after the account is opened (if it is a new account). I think it just needs to be a qualifying expense, so it doesn't matter if its a new child or an old child or what. I'm not sure about roll-overs from 2021 to 2022.
Thank you. I just read that article. Very informative. It looks like the variables are with the employer and allowance of 2021 DCFSA rollover to 2022. Assuming one will certainly incur expenses in 2022 that will exceed both the 2021 limit ($10,500) and the current 2022 limit ($5,000), it appears to make sense to fill up 2021 DCFSA and roll it over to 2022. As far as 1-3 months of care for 2021 is concerned, it seems as though taking the regular DC child credit on up to $8,000 of expenses and corresponding % linked to AGI is the play. I guess if the IRS releases higher amounts to DCFSA for 2022, then that changes the game as that will likely exceed the expenses incurred for 2022 (when factoring in 2021 rollover), but as of now the current limit for 2021 and 2022 is under a year's worth in the scenario as it stands now.
Jjsfr
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by Jjsfr »

deltaneutral83 wrote: Tue Jul 20, 2021 9:04 am
JWalterWeatherman wrote: Tue Jul 20, 2021 8:36 am There actually was an article at WCI about this topic yesterday/today that you might find helpful- https://www.whitecoatinvestor.com/dcfsa ... x-credits/
deltaneutral83 wrote: Mon Jul 19, 2021 2:41 pm after having first child now, spouse returns after leave later this year, will spouse have the opportunity to fill up the 2021 bucket for Employer FSA for child care from regular pay check, which is increased due to Covid? In addition, I've seen potentially it is within the employers discretion to roll over any unused FSA for dependent care monies from 2021 to 2022 from the recent Covid bill (however, don't know if this is for children already born before the legislation was passed just recently or children born anytime in 2021)?
I think this is accurate that you will be able to fill up the 2021 bucket, but you might want to call the employer benefits team to ask. I think the key is that the expense has to occur after the account is opened (if it is a new account). I think it just needs to be a qualifying expense, so it doesn't matter if its a new child or an old child or what. I'm not sure about roll-overs from 2021 to 2022.
Thank you. I just read that article. Very informative. It looks like the variables are with the employer and allowance of 2021 DCFSA rollover to 2022. Assuming one will certainly incur expenses in 2022 that will exceed both the 2021 limit ($10,500) and the current 2022 limit ($5,000), it appears to make sense to fill up 2021 DCFSA and roll it over to 2022. As far as 1-3 months of care for 2021 is concerned, it seems as though taking the regular DC child credit on up to $8,000 of expenses and corresponding % linked to AGI is the play. I guess if the IRS releases higher amounts to DCFSA for 2022, then that changes the game as that will likely exceed the expenses incurred for 2022 (when factoring in 2021 rollover), but as of now the current limit for 2021 and 2022 is under a year's worth in the scenario as it stands now.
My understanding of the dependent care worksheet for calculating tax credit is that if you have for example only $8,000 expenses and contribute$10,5000 to DCFSA you can not elect to choose the tax credit and roll over the whole $10,500 to 2021. I mean you can choose to roll over the $10,500 but you would not get tax credit.

However if your expenses exceed your contribution for 2021, let's say $16,000 for 2021 and only one child, and you contributed $10,500 to DCFSA, the amount you can choose to collect tax credit on is $5,500 not $8,000 while rolling over the full $10,500.

Another user pointed you to the toolbox and it may be helpful to visualize this scenario. You could also try the dependent care work sheet itself to see how the calculations work. If you do that just keep in mind it will probably not be updated for these 2021 values, but you would get to see how the DCFSA and child tax credit play together with expenses under and over your DCFSA contributions.
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deltaneutral83
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by deltaneutral83 »

Jjsfr wrote: Tue Jul 20, 2021 4:30 pm
My understanding of the dependent care worksheet for calculating tax credit is that if you have for example only $8,000 expenses and contribute$10,5000 to DCFSA you can not elect to choose the tax credit and roll over the whole $10,500 to 2021. I mean you can choose to roll over the $10,500 but you would not get tax credit.

Another user pointed you to the toolbox and it may be helpful to visualize this scenario. You could also try the dependent care work sheet itself to see how the calculations work. If you do that just keep in mind it will probably not be updated for these 2021 values, but you would get to see how the DCFSA and child tax credit play together with expenses under and over your DCFSA contributions.
I will need to verify the first point you made about only being able to deduct the amounts in your DCFSA for expenses you actually incurred in that year (2021 in this case). So in your example, if one had $8,000 of expenses for one child only in 2021, and made $10,500 contributions to the DCFSA in 2021, they would be able to choose how to allocate the $8,000 with the DCFSA/DC tax credit based on their AGI situation, and then rollover the remainder of the DCFSA to 2022, but they wouldn't get the tax deduction on the amount that was not used toward expenses out of the DCFSA ? Example, AGI is an amount that makes the DCFSA a better deal than the DC tax credit for 2021 and they use the entire $8,000 toward the DCFSA, then $2,500 that's left gets rolled over to 2022 but it's basically just cash that receives no deduction and must be used in 2022 toward child care ?


I was unable to find the tab on the toolbox concerning the DCFSA.
Jjsfr
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by Jjsfr »

deltaneutral83 wrote: Wed Jul 21, 2021 7:58 am
Jjsfr wrote: Tue Jul 20, 2021 4:30 pm
My understanding of the dependent care worksheet for calculating tax credit is that if you have for example only $8,000 expenses and contribute$10,5000 to DCFSA you can not elect to choose the tax credit and roll over the whole $10,500 to 2021. I mean you can choose to roll over the $10,500 but you would not get tax credit.

Another user pointed you to the toolbox and it may be helpful to visualize this scenario. You could also try the dependent care work sheet itself to see how the calculations work. If you do that just keep in mind it will probably not be updated for these 2021 values, but you would get to see how the DCFSA and child tax credit play together with expenses under and over your DCFSA contributions.
I will need to verify the first point you made about only being able to deduct the amounts in your DCFSA for expenses you actually incurred in that year (2021 in this case). So in your example, if one had $8,000 of expenses for one child only in 2021, and made $10,500 contributions to the DCFSA in 2021, they would be able to choose how to allocate the $8,000 with the DCFSA/DC tax credit based on their AGI situation, and then rollover the remainder of the DCFSA to 2022, but they wouldn't get the tax deduction on the amount that was not used toward expenses out of the DCFSA ? Example, AGI is an amount that makes the DCFSA a better deal than the DC tax credit for 2021 and they use the entire $8,000 toward the DCFSA, then $2,500 that's left gets rolled over to 2022 but it's basically just cash that receives no deduction and must be used in 2022 toward child care ?


I was unable to find the tab on the toolbox concerning the DCFSA.
No, sorry if that was the takeaway. What I meant to say is that if you choose to fully fund $10,500 into DCFSA for 2021 and have $8,000 of expenses, you can be reimbursed for $8,000 for 2021. You still get the tax benefit for $10,500 -- and the remaining $2,500 -- for 2021. However you can only spend the $2,500 in 2022 if your firm allows rollover.

The point I was trying to make was that you cannot fund $10,500 into a DCFSA, have $8,000 of expenses, and at tax time collect dependent care tax credit for $8,000 and roll over the $10,500 to next year. The DC tax credit calculation is $0 in this case as expenses did not exceed DCFSA contributions. The tax credit for DCFSA is already sort of factored in if you have payroll with holdings as your gross income is lower and the amount of DCFSA contributions is in box 12 I think.

I will PM you a link to a spreadsheet I use from another forum for visualizing this stufd so you can work through it.
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deltaneutral83
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by deltaneutral83 »

Jjsfr wrote: Wed Jul 21, 2021 10:22 am The point I was trying to make was that you cannot fund $10,500 into a DCFSA, have $8,000 of expenses, and at tax time collect dependent care tax credit for $8,000 and roll over the $10,500 to next year. The DC tax credit calculation is $0 in this case as expenses did not exceed DCFSA contributions. The tax credit for DCFSA is already sort of factored in if you have payroll with holdings as your gross income is lower and the amount of DCFSA contributions is in box 12 I think.

I will PM you a link to a spreadsheet I use from another forum for visualizing this stufd so you can work through it.
Thanks, I guess I'm in an AGI situation where for the remaining 2-3 months I'll have expenses in 2021 to use whatever of the $10,500 it takes, and then roll over (verified employer allowed) the remaining to 2022 of the DCFSA instead of using the DC tax credit in this equation for 2021 and starting 1/1/2022 with fully deductible $10,250 in the DCFSA. I had just assumed I could fill up the deductible $10,250 this year, roll it over to 2022, and spend it then and using the DC tax credit for whatever I spend in 2021.
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FiveK
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Re: Dependent Care FSA and/or Child Care Tax Credit

Post by FiveK »

deltaneutral83 wrote: Wed Jul 21, 2021 7:58 am I was unable to find the tab on the toolbox concerning the DCFSA.
It's part of the tax calculation done on the 'Calculations' tab. The projection of how the 2021 Form 2441 will look starts in cell AG17. Other than the basic items such as filing status, ages, income types, etc., the average monthly childcare costs go in cell B89, and any payroll withholding for the DCFSA goes in cells B6/C6.

For more instructions with accompanying screen shots on general inputs, see that link.
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