Why is my DCFSA increasing my taxes owed instead of reducing them?

But wait, if they're over the income limit for the Child and Dependent Care Credit anyway, shouldn't the DCFSA still be beneficial since it's pretax dollars? Or does something else kick in at higher income levels that makes DCFSA less advantageous?

That's an excellent question. Even though they're over the income limit for the Child and Dependent Care Credit, the DCFSA should still provide tax benefits since it reduces taxable income. What might be happening is a software calculation issue or potentially other phase-outs that are affecting their specific tax situation. For example, they might be hitting certain AMT (Alternative Minimum Tax) thresholds, or there could be interaction with other credits or deductions that change when the DCFSA is removed. Sometimes tax software can show counterintuitive results if there are multiple interconnected factors at play.

How does it actually work though? Do you just upload your W-2 and it tells you what's wrong? My situation is kind of similar but I'm using a DCFSA for elderly parent care expenses.

Sounds too good to be true tbh. Does it actually find stuff that TurboTax and other major programs miss? I've been burned before by "tax optimizer" services.

You just upload your tax documents - W-2s, 1099s, etc. - and it scans them for potential issues or optimizations. It's especially good at finding these weird edge cases where tax benefits interact in unexpected ways. The system flagged my DCFSA coding issue immediately. Yes, it absolutely finds things the major tax programs miss. TurboTax and others just do calculations based on what you input - they don't analyze whether your documents were prepared correctly in the first place. That's the big difference. It's like having a tax expert review your documents before you even start the filing process.

Wait this is actually a thing? How does it work? Do they have some special connection to the IRS or something? The hold times are insane whenever I try calling.

Sounds kinda sketchy tbh. You're telling me I'm supposed to trust some random service to connect me with the IRS? Couldn't they just be pretending to be the IRS and collecting people's personal info?

They don't have any special connection to the IRS - they just use technology to wait on hold for you. When they reach an agent, you get a call telling you an agent is on the line, and then you take over the call. It's really that simple. No, they don't pretend to be the IRS or collect your information. They just dial in, wait on hold (sometimes for hours), and then call you when they reach a human. You're the one who speaks directly with the IRS agent. It's basically like having someone physically hold your phone while it's on speaker until someone answers, then handing it back to you.

I think you might be onto something here. I just went back and looked at my W-2 more carefully. The $5000 is in Box 10 as expected, but now that I'm looking at it, I think it might also be included in Box 1. How would I verify this for sure? And if it is wrong, what do I do - ask for a corrected W-2?

To verify if it's included in Box 1, you could compare your final paystub of the year with your W-2. Your last paystub should show your cumulative earnings and deductions for the year. If you take your gross earnings and subtract pre-tax deductions (including the DCFSA), the result should match your Box 1 amount on the W-2. If Box 1 is higher by about $5000, then your DCFSA wasn't properly excluded from taxable wages. If you confirm there's an error, yes, you should contact your employer's payroll or HR department and request a corrected W-2 (W-2c). This is actually a fairly common mistake, and they should be able to fix it. Once you receive the corrected W-2, you can file your taxes with the accurate information.

Good catch! I think they probably meant the 2023 tax year (that we file in 2024) since we can't file 2024 taxes yet. This is why taxes are so confusing - the year you earn money vs the year you file!