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During these days we have an enrollment period for 2014 benefits at my workplace. After this window, no changes will be allowed to my contributions selections.

One of the benefits is a DCFSA. One attribute of such benefit is that one can take advantage of it up to the smaller income among him or his spouse (and up to $5000 for two kids).

Generally, any money that is not claimed by the end of the year is forfeited - which is why it is important to not simply make the maximum contributions.

In past years I used this account to claim DC expenses while my spouse was a full time employee. In 2014, I expect her to have some unpredictable income - certainly not something to plan accordingly.

That said, according to the US Forms 1040 and 2441 instructions, any distribution over the maximum eligibility (determine by the lower earning person) should be reported as taxable income on the Form 1040.

If my understanding is correct, then the best strategy should be to:

  1. Make maximum contributions - up to the actual expenses per child.

  2. Claim all the money during the year, according to the actual payments and account balance.

  3. The difference between this amount and whatever the spouse will earn during 2014 will go back to the 1040 w/o any penalty.

To make an actual example, say the numbers are:

  1. $1,500 child #1 afterschool ("aftercare") program
  2. $5,000 child #2 preschool
  3. $2,000 possible spouse earning

Then:

  1. Make $5,000 contribution to DCFSA (the plan maximum)
  2. Claim $5,000 expenses during the year.
  3. When filing 2014 returns - account $2,000 for credit and add $3,000 to the amount of income reported in W-2's.

Is this correct? Am I risking any money by utilizing this strategy?

Although expenses can also be credited via that child tax credit, it is better to have it under DCFSA, so I want to maximize this benefit, but w/o risking the deposit money.

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Here's an answer received elsewhere.

Yes, it looks like you have a pretty good understanding the concept and the process.

Your wife's income will be so low - why?

If she is a full-time student in any of those months, you may attribute $250 x 2 children worth of income for each of those months.

Incidentally, even if you do end up paying taxes on the extra $3000, you won't be paying the employee's share of Social Security and Medicare (7.65%) or state disability on those funds. So you still end up saving some tax money.

No doubt, there's no need to remind you to be sure that you submit all the valid receipts to the administrator in time to get reimbursed.

And a must-have disclaimer:

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this email, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. ... Any information contained in this email does not fall under the guidelines of IRS Circular 230.

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