Dependent Care FSA - American Rescue Plan - CONFUSED!!!

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ddurrett896
Posts: 1712
Joined: Wed Nov 05, 2014 2:23 pm

Dependent Care FSA - American Rescue Plan - CONFUSED!!!

Post by ddurrett896 »

I elected to contribute $5,000 for 2021 Dependent Care FSA and just received an email from my employer that high earners are capped at $1,400 after an annual compliance test. Effective this week, I can no longer contribute and will be capped at the $1,400 which has already been deducted.

My wife's employer said this qualifies as a life event and she can add the remaining $3,600 Dependent Care FSA thru them within 30 days.

Seems like a no brainer, but I've seen threads on the American Rescue Plan and skipping the Dependent Care FSA as a better option to take advantage of tax credits. I've searched the internet and can't wrap my head around it and hoping you can help! I've included my info below to help. Thanks!

Filing Status: Married Filed Joint
Combined Gross Income: $255,000
Total Deductions: $44,000 (his 401K $19.5K her 401K $19.5K, HSA $3.5K, Dependent Care FSA $1.4K)
Net Income: $211K
Standard Deduction: $25,100
Final Income: $185,900

3 kids, only 1 in school that qualifies for Dependent Care FSA and the tuition is right at $5K for the year.
Last edited by ddurrett896 on Sat Apr 10, 2021 3:58 pm, edited 1 time in total.
WS1
Posts: 497
Joined: Wed Jan 07, 2015 2:45 pm

Re: Dependent Care FSA - American Rescue Plan - CONFUSED!!!

Post by WS1 »

ddurrett896 wrote: Sat Apr 10, 2021 3:30 pm I elected to contribute $5,000 for 2021 Dependent Care FSA and just received an email from my employer that high earners are capped at $1,400 after an annual compliance test. Effective this week, I can no longer contribute and will be capped at the $1,400 which has already been deducted.

My wife's employer said this qualifies as a life event and she can add the remaining $3,600 Dependent Care FSA thru them within 30 days.

Seems like a no brainer, but I've seen threads on the American Rescue Plan and skipping the Dependent Care FSA as a better option to take advantage of tax credits. I've searched the internet and can't wrap my head around it and hoping you can help! I've included my info below to help. Thanks!

Filing Status: Married Filed Joint
Combined Gross Income: $255,000
Total Deductions: $44,000 (his 401K $19.5K her 401K $19.5K, HSA $3.5K, Dependent Care FSA $1.4K)
Net Income: $211K
Standard Deduction: $25,100
Final Income: $185,900

3 kids, only 1 in school that qualifies for Dependent Care FSA.
The new married limit is $10,500, but my HR hasn’t updated the software yet to allow me to change to the new limit.

I think the previous threads talking about opting out of the new higher limit were for people with less income.
csmath
Posts: 826
Joined: Sat Oct 13, 2018 11:32 am

Re: Dependent Care FSA - American Rescue Plan - CONFUSED!!!

Post by csmath »

You absolutely want to max the DCFSA. Your income level is deep into the phaseout of the DC Tax Credit and you will save much more per dollar spent by avoiding the taxes via FSA.

Edit to add: If your wife's plan allows for the increased limit, and you are sure your DC expenses are high enough, elect for as much DCFSA as you are allowed.
atomicrc11
Posts: 236
Joined: Sat Nov 08, 2008 7:51 pm

Re: Dependent Care FSA - American Rescue Plan - CONFUSED!!!

Post by atomicrc11 »

The search function is your friend: https://www.google.com/url?sa=t&rct=j&q ... t1F3v2cYJ_

Technically with the new $10.5k limit, you could contribute $1400 to your DCFSA, $5000 to your wife's DCFSA, and still get some deduction from the dependent care credit. You'll have to calculate your credit which goes down with rising income. Also, you don't specify your salary breakdown, but you'll end up saving more if you aren't over the Social Security wage base and if you have state taxes.
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