Flexible Spending - Dependent Care

[Yardley CPA]

Received this email from my client:

"I have an important tax question; I over donated to my pre tax dependent care account at work. I have had almost $3,900 deducted from my paycheck since 1/1/20. When Covid began, I removed my daughter from daycare but did not cancel or change my paycheck deduction at work until 10/1/20. I only spent approximately $2,500 at daycare and can provide receipt for that. I haven’t done the exact math, but I have over donated by about $1500. My question is this; my mother has provided daycare for my daughter regularly since 6/4/20.  Is there a way that I can legally and ethically pay her for daycare so that I don’t “lose” the money that was pretax?"

I believe if we show the mother as the provider and list her social security number on the  2441, it would qualify.  Am I correct?  

Can anyone share their thoughts please.

Thanks!

 

[Possi]

Yes, that works. 

[Catherine]

And as long as she actually gets paid, and claims the income.

[Yardley CPA]

56 minutes ago, Catherine said:

And as long as she actually gets paid, and claims the income.

But that would be an issue for the mother.  The intent is to pay her.  If her mother does not include that income on her personal return, that is not my clients problem.  Right?  Obviously, my client would discuss this and maker her aware of her responsibilities, but the rest is on the mother. 

[Lion EA]

If mother is a household employee of your client, then your client files Form W-2. If mother runs her own daycare business, then your client asks for her mother's biz name, TID, and amount received from your client, an annual statement to back up her Form 2441.

However, your question is about your client's Flexible Spending Account at her employer, so your client can ask her employer what type of documentation, payment receipts, etc., she needs from her daycare provider/mother to turn into her employer's FSA to get reimbursed, use up her 2020 FSA contributions.

[Abby Normal]

And don't forget to tell mom she needs to report this on her taxes!

[Catherine]

On 10/16/2020 at 4:57 PM, Yardley CPA said:

But that would be an issue for the mother.  The intent is to pay her.  If her mother does not include that income on her personal return, that is not my clients problem.  Right?  Obviously, my client would discuss this and maker her aware of her responsibilities, but the rest is on the mother. 

Yes, but considering it's family, the nice thing is to check and make sure it won't cause mom more problems than it solves adult child. Does mom live in subsidized housing where a small amount of extra income will triple her rent, for example?  Sometimes it can do the overall family more good for one person to just eat the extra taxes, rather than shift it to another.

[Pacun]

So much work and ethically questions to work on for just $500?  If your client has only a "daughter" the limit is $3K, correct? Let the $1500 transfer to line 7 on your client's return and be done with.