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Dependent Care Flexible Spending Account tax question

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djpharm

Junior Member
What is the name of your state (only U.S. law)? Wisconsin

I elected a $1,200 contribution to the Dependent Care FSA for 2017. We have a child in nursery school two days per week. I may have misunderstood the DCFSA rules at the time, but when I made the election it was with the expectation that my wife would begin working from home in 2017. She has since decided to stay a full-time parent and did not have an earned income in 2017. (She had previously planned on reselling up-cycled/refinished furniture as a "side job", but this never coalesced). My 2017 W-2 box 10 shows the $1,200 benefit (that was exempt from pay-roll taxes, etc.).

My questions are:
How do I handle this on my 2017 tax return? If the IRS sees the $1,200 dollar election from my W-2 but no earned income for my spouse will we face a penalty? Be audited?
My understanding is that even if she started a business she would have had to show a net profit of at least $1,200 on her Schedule C in order for us to legally claim the $1,200 tax exemption. Is this correct?

Thank you for any advice you can offer.
 


LdiJ

Senior Member
What is the name of your state (only U.S. law)? Wisconsin

I elected a $1,200 contribution to the Dependent Care FSA for 2017. We have a child in nursery school two days per week. I may have misunderstood the DCFSA rules at the time, but when I made the election it was with the expectation that my wife would begin working from home in 2017. She has since decided to stay a full-time parent and did not have an earned income in 2017. (She had previously planned on reselling up-cycled/refinished furniture as a "side job", but this never coalesced). My 2017 W-2 box 10 shows the $1,200 benefit (that was exempt from pay-roll taxes, etc.).

My questions are:
How do I handle this on my 2017 tax return? If the IRS sees the $1,200 dollar election from my W-2 but no earned income for my spouse will we face a penalty? Be audited?
My understanding is that even if she started a business she would have had to show a net profit of at least $1,200 on her Schedule C in order for us to legally claim the $1,200 tax exemption. Is this correct?

Thank you for any advice you can offer.
An FSA account is a use it or lose it account. Therefore, its not going to impact your taxes, but you are going to lose the $1200.00.
 

justalayman

Senior Member
An FSA account is a use it or lose it account. Therefore, its not going to impact your taxes, but you are going to lose the $1200.00.

I didn’t see where the op stated they had or had not withdrawn the money from the fsa account.
 

LdiJ

Senior Member
I didn’t see where the op stated they had or had not withdrawn the money from the fsa account.
Ok, in re-reading I do see that the child did attend nursery school two days a week even though his wife wasn't working, therefore its possible that the money was withdrawn to cover daycare expenses even though they technically were not needed.

If that is the case, then the money will become taxable income.
 

justalayman

Senior Member
Ok, in re-reading I do see that the child did attend nursery school two days a week even though his wife wasn't working, therefore its possible that the money was withdrawn to cover daycare expenses even though they technically were not needed.

If that is the case, then the money will become taxable income.
Would there be any penalties involved?
 

cbg

I'm a Northern Girl
Agree with LdiJ. The IRS recognizes and has acknowledged that there will be occasional FSA "mistakes" where an FSA eligibility status change happens mid-year, or even when both spouses enroll and their combined enrollment exceeds the maximum. It, or the excess, becomes taxable income and that's it as far as the IRS is concerned.
 

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