Child Care

[GraceNY]

I'm thinking maybe there is someone out there who has set up a "dependent care" benefit program for an employer might be able to shed some light on this or a tax preparer who has seen these types of situations can comment on

these cases in terms of how they should be handled on the tax return. Both involve "taxpayers who work at the facility where the child care is provided." I know these are "wordy," but I wanted to make sure I included as much detail as possible. I used round numbers to keep the math simple. I just can't seem to get a handle on these and would appreciate any helpful input....

(1) Taxpayer paid her child care expenses with pre-tax monies. For example, taxpayer grossed $825 and had $325

deducted as "child care" under her deductions and was taxed on $500. I know this only from looking at the

paystub. On the W-2, it shows Wages of $13,000 in Box 1 ($500 x 26 weeks), and the same $13,000 in Boxes 3

and 5 (social security and medicare wages, respectively). There were no amounts in Box 10 or any other box.

I don't know, and neither does the taxpayer, whether or not this is a bonafide dependent care flexible spending

arrangement (FSA). The W-2 reporting for Box 1, 3 and 5 would be correct if there was an FSA involved (FSA

contributions reduce amounts reported in Box 1, 3 and 5). This was a "new" client for me this year and when

she gave me the amount of "child care" expenses she paid for her 2 children, it just didn't make sense from

just looking at the W-2..how could someone make only $13,000 and pay $5,000 in "child care" expenses? That's

when I asked for the year-end pay stub and saw what was going on. She had a total of $8,450 in pre-tax "child

care" deductions ($325 x 26 weeks = $8,450). And, the taxpayer claims that the money went directly from her

paycheck to the child care facility. It just doesn't make sense to me. (1) I thought that there was a $5,000

limit on "dependent care benefits" via a fringe benefit program at work? (2) Shouldn't Box 10 or Box 14 be

filled in if there is a "dependent care" fringe benefit that the taxpayer is participating in? (3) I

believe that this should be handled by reporting the excess deferral $3,450 ($8,450 - $5,000) as income on line

7 labeled "DCB" and there is no "child care" credit 'cuz she got the benefit with pre-tax deductions?

(2) Taxpayer's employer provides a 50% discount on "child care." The facility charges $250 a week for child care.

Employer (facility) discounts it $125 and the taxpayer(employee) pays $125 via payroll deduction (NOT pre-tax.

So, based on these numbers, over a 20 week period, the facility has charged $5000, the employer has provided

a discount in the maount of $2,500 and the taxpayer(employee) has paid $2,500. According to the "employer,"

"the so-called IRS formula is as follows: the "discount" is $2,500 ($5,000 x 50%), the "tax free fringe

benefit" is $1,000 ($5,000 x 20%) and the amount taxable to the employee is $1,500 ($5,000 x 30%)." When I

look at the taxpayers' (employees') records, I see $2,500 of payments made to the child care facility and

when I look at the paystubs, I see inputed income in the amount of $1,500 which has been taxed accordingly.

On the W-2, the $1,500 of inputed income appears in Box 14 and nothing in Box 10. The taxpayer(employee)

has 1 child being cared for. Am I correct in computing the Form 2441 credit based only on the $1,500 (the

amount taxed to her)?

Thanks in advance for your input...

Grace