My wife works part-time, and typically makes around $20k per year doing so. We try to put as much of her income as we can into her 401k, so that'll be $18500 next year. Next year we're considering using a dependent care FSA to send our daughter to a preschool part of the week while my wife works her part-time job. Now my understanding is that to be eligible to use the FSA, we can't claim a FSA benefit which is larger than the smaller of our two "earned" incomes. My question is, if we put $18500 into her 401k, would her earned income only be $20k-18.5k = $1.5k? Or would her earned income for the purpose of an FSA credit be the full $20k?

  • Are you planning to use the dependent care FSA through your employer or your wife's? – TTT Nov 12 '17 at 4:42
  • It would be through my employer. – gammapoint Nov 12 '17 at 12:36

In your particular scenario, your wife's earned income would be based on $1500, which would be the max you could take advantage of from your employer's FSA plan. (You probably can't use your wife's FSA since FICA taxes would eat up the remainder of her $20K income.)

However, if your wife's employer offers a Roth 401k option, you could elect to contribute (at least) $3500 to the Roth and the remainder to the Traditional 401k. This would leave her earned income at $5K so you could take the maximum FSA deduction from your employer's plan. Note that by doing this your wife may then have some tax withholding that could possibly prevent her from being able to max out the 401k. You could counter this by increasing the number of exemptions on her W4 form, and then adding extra withholding payments on your W4 to make up for it.

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    In your scenario, I see $3500 income. Great. But where's the actual cash to fund the FSA? There's no money left to take the FSA deduction. (And now I see OP comment, coming out of his pay. His employer won't ask about the wife's income.) – JTP - Apologise to Monica Nov 12 '17 at 13:16
  • Thanks for your analysis, and for your possible workaround with a Roth 401k contribution. I'm not sure if she has access to a Roth option, but will look into it. Seems this choice won't save us too much taxes in the present (since her income will show up on our marginal rather than mine), but perhaps some FICA savings or something. Our childcare situation is uncertain enough that it the timing and use of the funds constitutes some low to moderate risk for us, perhaps high enough that performing some tricks for little tax savings isn't worth the risk. – gammapoint Nov 12 '17 at 13:38
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    @gammapoint - you're right that the total tax outlay for the year is almost the same either way and also that you do save FICA on the $3500 that is "moved" over to the FSA deduction rather than from the 401k deduction. The real benefit though is that you get the $3500 into the Roth which is tax free for life. That being said, FSA is use it or lose it and if there's a chance of losing it I would consider not maxing out the full 5K. – TTT Nov 12 '17 at 16:02
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    @JoeTaxpayer - I calculated $3500 additional income from Roth, + $1500 leftover to begin with, bringing the total to $5000 to allow for the full FSA contributions. Your comment about "His employer won't ask about the wife's income" is interesting. I would think the onus is on the employee to make sure they are eligible to actually contribute the desired amount to the FSA, not the employer? – TTT Nov 12 '17 at 16:05
  • Parsing thru question again. I misunderstood. FSA deposit is limited to 'spouse' income. Your idea is fine, the SS counts as would the Roth. – JTP - Apologise to Monica Nov 12 '17 at 21:54

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