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Frequently Asked Tax Questions And Answers
Keyword: Flexible Spending Account
7.1 Child Care Credit/Other Credits : Child and Dependent Care Credit & Flexible Benefit Plans
I paid into a dependent care benefits plan and the amount is shown
in Box 10 of my Form W-2. However, the cost paid to the child care provider
was more. Can the additional expense not paid into the dependent care benefits
plan and not shown in Box 10 of the W-2 be claimed on Form 2441?
That depends on the amount you elected to have contributed to the flexible
spending arrangement. The exclusion from income for employer-provided benefits
can be as high as $5,000, while the credit for dependent care expenses is
based on annual dollar limits of $3,000 for one person and $6,000 for two
or more persons. You must reduce those dollar limits by the amount of excludible
dependent care benefits. If you had expenses that you paid yourself and the
employer provided benefits were less than the applicable dollar limit, you
can also claim the credit. Complete Part III of either Form 2441 (PDF), Child and Dependent Care Expenses, or Form 1040A, Schedule 2 (PDF), Child and Dependent Care Expenses for
Form 1040A Filers, to determine the excluded benefits and whether you can
claim the credit.
Change. The applicable percentage and allowable employment-related
expenses increase beginning in 2003. The maximum applicable percentage is
35 percent and the allowable employment-related expenses are $3,000 for one
qualifying child and $6,000 for two or more qualifying children (Code Sec.
21, as amended by the Economic Growth and Tax Relief Reconciliation Act of
2001). Thus, the maximum credit is $1,050 for one qualifying child and $2,100
for two or more qualifying children.
References:
If my employer did not put the amount I paid into a flexible spending
account for dependent care in box 10 on my Form W-2, can I claim the Child
and Dependent Care Tax Credit?
If the omission was simply a clerical oversight, you may not claim the
child care credit. If the flexible spending account was an eligible plan under
Internal Revenue Code Section 125, the amount of the salary reduction that
was contributed to your account should appear in box 10 of your Form W-2.
Request a corrected Form W-2 from your employer.
You may claim the child care credit if the contribution to your flexible
spending account was less than your annual dollar limitation for eligible
expenses ($3,000 for one person, or $6,000 for two or more persons). Even
if you cannot claim the credit, you must complete Part III of either Form 2441 (PDF), Child and Dependent Care Expenses,
or Form 1040A, Schedule 2 (PDF), Child and
Dependent Care Expenses for Form 1040A Filers, to exclude your employer
provided benefits from your income. If the amount you paid into a flexible
spending account reduced your wages in box 1 of Form W-2, it is considered
an employer provided benefit.
References:
I was under the impression that a Dependent Care Benefit Plan would
benefit me, not penalize me with an increase in taxes. How can my employer
say they provided a benefit in the total amount of $3,000 in W-2, Block 10
when I had $3,000 in wages set aside for dependent care benefits?
The actual mechanism for this type of plan is an agreement to voluntarily
reduce your salary in return for an employer-provided fringe benefit. These
plans must be set up this way because you have a choice of whether to receive
the cash wages or the benefits, which would make the benefit taxable to you.
Therefore, the benefits are actually employer provided or funded. You are
receiving a tax benefit because you are not paying taxes on the money that
is set aside.
References:
How do I complete Form 2441 if I have flexible Spending Account?
You must complete Part III of Form 2441 (PDF), Child
and Dependent Care Expenses , (or Form 1040A, Schedule 2 (PDF), Child
and Dependent Care Expenses for Form 1040A Filers) to claim the exclusion
of the benefits from income even if you cannot claim the credit. Enter your
total employer-provided dependent care benefits on line 12 (this amount should
appear in box 10 of your Form W-2) and your qualified expenses on line 15.
The last six lines of Part III will determine whether you can also take the
credit and what your dollar limit is on qualified expenses. Also Complete
Part I, Persons or Organizations Who Provided the Care.
References:
I am self-employed, but did not have a net profit last year. Is
it correct that we do not qualify for the Child Care Credit on our joint return
even though my wife received dependent care benefits on her W-2 box 10?
Generally, yes. When you complete Part III of Form 2441 (PDF), Child and Dependent Care Expenses, which you must do
to claim excluded benefits, line 17 asks you to enter the smallest of:
your dependent care benefits,
your qualified expenses,
your earned income, or
your spouse's earned income.
If you had a loss from self-employment and no other earned income, your
earned income would be $0, unless you can use one of the optional methods
on Form 1040, Schedule SE (PDF), Self-Employment
Tax. That would mean that the amount in box 10 of your wife's Form W-2
would have to be included in income. (For more information on the optional
methods of computing self-employment tax, refer to Publication 533, Self-Employment
Tax, or
Instructions for Form 1040, Schedule SE, Self-Employment
Tax.
The income considered to be earned by a spouse who is a full-time student
or who is incapable of self-care is $250 per month if there's one qualifying
individual in the household, and $500 a month if there are two or more qualifying
individuals. However, this income is deemed to be earned only by one spouse
for any given month. (Code Sec. 21 (d) (2)).
References:
Is a flexible spending account for dependent care a dependent care
benefit?
Yes. If the flexible spending account is providing you with a dependent
care benefit, then it should be reported in box 10 of your Form W-2. These
accounts are funded through a salary reduction, so the contribution to the
account is considered an employer contribution. When you receive a dependent
care benefit from your employer, you must complete Part III of Form 2441 (PDF), Child and Dependent Care Expenses, (or Form 1040A, Schedule 2 (PDF), Child and Dependent Care Expenses for
Form 1040A Filers) to see if the benefits are fully excluded from income.
You may be able to also claim a credit for child and dependent care expenses
if the excluded benefits are less than the dollar limit on qualified expenses
for the credit.
References:
12.3 Small Business/Self-Employed/Other Business : Form W–2, FICA, Medicare, Tips, Employee Benefits
What publications are available that would explain the taxation
policy for Cafeteria Plans and Health Care Flexible Spending Accounts ?
Information on Health Care Flexible Spending Accounts and Cafeteria Plans
can be found in the following sources listed below:
References:
Is an employer required to provide the IRS with a signed receipt
from a dependent care provider in order to release funds that are withheld
from an employee's pretax salary and deposited to a dependent care flexible
spending account?
The Internal Revenue Service does not specify a method for the documentation
of reimbursable expenditures. Good accounting and business practices should
dictate the type and sufficiency of documentation provided by employees who
claim reimbursable expenses. Please review the plan document to determine
if it specifies the type(s) of documentation acceptable.
References:
Can an employer pay for health care costs of an employee as a fringe
benefit?
Yes, generally an employer may pay for health care costs of an employee
as a nontaxable fringe benefit. Refer to Publication 535, Business
Expenses , for a complete discussion of employee benefit programs.
References:
If our company pays for the employee's health care costs directly
to the medical facility, as opposed to a reimbursement, is the employee benefit
reported on Form W-2 and subject to social security withholding?
Health care costs paid directly to the medical facility is normally a nontaxable
employee benefit provided that it is paid as part of an accident and health
plan. Refer to Publication 535, Business Expenses, for more information
on employee benefit programs.
References:
If an employer pays health insurance benefits for the employee and
dependents, are both the employee's and the dependent's benefits income to
the employee?
If an employer provides health insurance for the employees, the benefit
provided is generally not taxable to the employee. An employer can generally
deduct the cost of a group health plan on the "employee benefit programs"
line of their business income tax return.
Group health plan defined: This (including a self-insured plan) is a plan
that provides medical care to your employees, former employees, and their
spouses and dependents. The plan can provide care directly or through insurance,
reimbursement, or otherwise. The employer can exclude the cost of providing
group health insurance to an employee from his or her wages.
References:
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