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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 453
Experience:  Former IRS Revenue Agent
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I have questions about tax savings with Dependent care FSA

Customer Question

I have questions about tax savings with Dependent care FSA and tax credit for 2017 tax year. Here is my situation.
I expect 150k income in 2017. I will file married filing jointly. My wife can't work because of visa (not disability) we have 2 children ages 1 and 4. Let's say my wife will be full time student for 4 months in 2017. My employer provides dependent care FSA with $5000 max contribution.
Questions:
1. How much can I deduct from tax maximum? Let's say I will spend 5k from my fsa (contributed solely from my pretax paycheck) and 2k out of pocket.
Why? Can I deduct from California income tax too?
2. how does "Should work or look for work or full time student rule" enforced?
3. Can I change my contrubition amount to FSA in the mid year?
4.
- Am I in the following exception because of my salary above 120k/year?
https://www.irs.gov/pub/irs-pd…
Exception for highly compensated employees.
You can't exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program don't favor highly compensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code.
5. How about this year? I will start this job next month (october) My wife can't work and not a full time student. Any tax benefits?
Submitted: 6 months ago.
Category: Finance
Customer: replied 6 months ago.
Posted by JustAnswer at customer's request) Hello. I would like to request the following Expert Service(s) from you: Live Phone Call. Let me know if you need more information, or send me the service offer(s) so we can proceed.
Expert:  Dr. Fiona Chen replied 6 months ago.

Dear Customer,

1) Pre-tax income is deducted from the federal tax return. Therefore, when it is flow to the state, the same wage income remains.

Please make sure that the FSA account is Dependent Care Flexible Spending Account.

2) The 2,000 child care expenses should be used for the child care when your wife is in school. That is how the "Should work or look for work or full time student rule" applies. But in terms of enforcement, the U.S. tax system relies on taxpayer's self-compliance and self-reporting. It is like some cities have passengers purchase the correct ticket amounts, and the conductor only sample check people's ticket. We need to self-report and make and keep records on our activities in each categories with dates, activities, etc. to verify our activities.

https://www.irs.gov/credits-deductions/individuals/child-and-dependent-care-credit

https://www.irs.gov/taxtopics/tc602.html

https://www.irs.gov/pub/irs-pdf/f2441.pdf

3) "Can I change my contrubition amount to FSA in the mid year"

The simple answer is no. But the employer may allow extra time to spend the money, etc.

https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/

4) The FSA may be able to used for medical expenses also or only. Please verify. It may be towards your benefit. This also answers your question #5 above.

5) As to the highly paid employee, it depends on how many people are also paid as such.

You can choose to ignore test (2) of pay higher than 120,000 in the prior year, if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year.

https://www.irs.gov/pub/irs-pdf/p15b.pdf, page 9.

6) Your income level may be too high to claim child and dependent care credit in the State of California.

https://www.ftb.ca.gov/individuals/faq/ivr/103.shtml

Please read this posting fisrt. If you still need extra service, just accept my offer.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP