Double Dipping Dependent Care FSA

Both my employer and my wife's employer offer a dependent care FSA. I have read that we may only contribute $5k combined per year to dependent care FSAs. But what happens if we double up? Is there a penalty if we both contribute $5k? From what I've been able to determine, there is no penalty - you just have to add the excess contribution back in to your taxable income. Sounds reasonable.

What about FICA, though? Can we still save on FICA by doubling up on our FSA contributions? It's not much: 7.65% * $5000 = $382.50. But, hey, that would pay for a couple of my wife's hair appointments.

Thanks in advance, Bill

Reply to
Bill Woessner
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I'm not aware of a penalty, but if theree isn't one, I think there should be. Else anyone, even those with no kids or day care, could sign up and save the FICA. (I think the present proposals out of the White House would extend the 2% FICA relief.)

You seem to understand the current situation.

Reply to
Arthur Kamlet

If you have TurboTax (or other) on your computer, you should run this scenario to see the results. My money says that the tax forms will catch the FSA going over, tax the extra $5000 and include the FICA you didn't pay.

Reply to
JoeTaxpayer

Using Creative Solutions Thompson-Reuters UltraTax, the additional taxable amount comes to line 7 labeled DCB (Dependent Care Benefits) but there's no additional FICA, nor should there be.

Reply to
Arthur Kamlet

Art - I believe when you say there's no additional FICA, but why "nor should there be"? This opens a unintended loophole to avoid FICA on $5K of income. The same way I get credit if I hold two jobs and go over the FICA limit, I get a refund, I'd expect (wrongly, as you pointed out) that the tax forms pick that back up.

Reply to
JoeTaxpayer

"nor should there be" follows the code.

Whether the writers accidentally or deliberately caused this to happen is an interesting question, but as written, there's no added-back FICA.

It also could just be that non-Income tax issues don;t excite IRS much.

FICA is not an Income Tax issue, although IRS collects FICA in some cases, it gets less credit for collecting these "other taxes" than income taxes.

Reply to
Arthur Kamlet

[...]

As Art and Joe mention in subsequent posts to this thread, there is a valid loophole to avoid a relatively small amount of FICA tax. Without trying it, I suspect that even both spouses can take advantage of the FICA loophole when the DCB (Dep. Care Benefits) amount gets added back into taxable income for income tax purposes.

Another scenario is a single-earner couple, where the earner can still get the FICA loophole, even though spouse has no earned income and therefore no day care credit for the couple (DCB is added back as wage income for income tax purposes).

However, I don't think an employee can normally "sign up" for a dependent care FSA (Flexible Spending Account) if they don't have dependents in day care. I don't think they'd get reimbursed if they couldn't turn in receipts from a valid day care provider. In the case of forfeiting the $5K FSA, at least they wouldn't be taxed on it, but that doesn't offset the forfeited amount.

The day care credit has always been a little odd, it's the only common one I know of that never completely phases out no matter how high the AGI. On the flip side, for many the credit only offsets a small fraction of the total cost of daycare, as the amount of the credit has not been indexed to inflation over its long life.

Reply to
Mark Bole

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