Dependent FSA Enrolled, but no Job

Assuming that the plan you have been contributing into is a Dependent Care Assistance Plan (DCAP), then you must look to the plan document to see if the day care expenses for your child are reimbursable.

You must look to tax law to see if any reimbursement is tax-free. Based on the facts you present (your spouse will not have any earned income; nor is she nor will she be a full time student and therefore have deemed earned income) and assuming she is not mentally or physically disabled such that she can not care for herself, then you would not be entitled to any tax-free benefits.

The rule you reference regarding "actively looking for a job", requires that the spouse have at least some earned income for the year in order for you to have qualified dependent care expense. If she were a full time student, she would have deemed earned income of $200 for every month she was a full time student.

As such, if you receive reimbursement from the plan for your child's day care expense, you would have to complete Part III of Form 2441 to calculate the taxable amount. In your case, the taxable amount would be the amount reimbursed. You enter this amount on Line 7 of your 1040 and make a notation on that line that says "DCB." All commercially available income tax software can do this for you.

I'd wager it is reimbursable--is it actually possible for the employer to set up a plan where they can keep the money even if legitimate expenses are submitted timely? Surely they would be required to tell the employee at sign-up time about this....

Make that $250/month with one child, $500 for two. The amounts are designed to come out at $3K and $6K annually, the maximum qualifying expenses if the credit is being claimed with one or two-plus dependents, respectively.

As Alan said, if you don't meet the requirements for tax-free employer reimbursement, then the amount (box 10 of your W-2) gets added back into taxable income for the year.

It's almost as if you hadn't set up deductions with your employer, except for three things:

1) the expense/hassle of filling out an extra tax form, 2) your employer won't do withholding to cover the tax on this amount, 3) you'll be avoiding social security (if you're not over the annual maximum) and medicare tax on the deductions, which could be good or bad depending on your point of view.

-Mark Bole

without earned income, the time your spouse was unable to care for your dependent(s) because she was looking for work is moot (see Pub.

503). Distributions from an FSA must be for "qualified medical expenses" to be tax-free. If you receive dependent care benefits, those benefits would become taxable to you if your wife had: no earned income, was not a full-time student, and isn't disabled. But it's a good question.