Dependent Care FSA: What if my spouse is a full-time student AND works?

Question

I work full-time. My employer provides access to a dependent care FSA. My wife goes to school full time and as a result we have dependent care expenses for two eligible dependents. She also works part time and we have additional dependent care expenses as a result.

The 2017 limit for married filing joint dependent care FSA is $5000.

My earned income will be larger than $5000. If my wife's earned income is less than $5000, does that limit how much we can contribute toward the dependent care FSA?

IRS Publication 503 indicates:

• For a full-time student you can claim $250 earned income each month of being a full-time student.
• Your earned income limit for a month is the greater of $250 or your actual earned income.

If my wife earns more than $250 in a month can I use that as her earned income for that month instead of $250?

Answer 1

This situation of a spouse that is a full-time student and also works is covered in IRS Publication 503 in the section titled Earned Income Limit:

You or your spouse is a student or not able to care for self. Your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned income. His or her earned income for each month is considered to be at least $250 if there is one qualifying person in your home, or at least $500 if there are two or more.

Spouse works. If your spouse works during that month, use the higher of $250 (or $500) or his or her actual earned income for that month.

Spouse qualifies for part of month. If your spouse is a full-time student or not able to care for himself or herself for only part of a month, the full $250 (or $500) still applies for that month.

Here's how this works: For each month of the year, you look at whether or not your wife was a full-time student for even part of the month. If so, compare your wife's actual earned income for that month to $500 (because you have two dependents), and use the larger amount as her earned income amount for that month. Add up all twelve months, and you have your wife's earned income for the purposes of the dependent care benefit limit.

As an example, if she was a full-time student for at least ten months, with your two dependents at home she would be over the $5000 mark even if she didn't have any income from a job at all.