Should Line 10, Dependent Care Benefits, of my Form W-2 be included when calculating my income?

A portion of the amount in Box 10 of the Form W-2 may be includable in your income. Please refer to the Instructions for Form 2441, Child and Dependent Care Expenses, 1040A filers refer to Form 1040A, Schedule 2 (PDF), Child and Dependent Care Expenses for 1040A Filers to determine how much, if any, of the dependent care benefits may be excluded. If you meet the requirements described in Form 2441 (PDF), Child and Dependent Care Expenses, you can exclude up to $5,000 of dependent care benefits provided under a qualified employer plan. However, this amount is reduced or eliminated if your earned income (or your spouse's earned income) is less than $5,000, or if your child is not under age 13. Any benefits that exceed the exclusion limit ($5,000) are also includable in your income, and your employer should have included these amounts in Boxes 1, 3, and 5 of your Form W-2 in addition to reporting these amounts in Box 10. The amount you can exclude is figured and claimed by completing Part III of Form 2441 or Schedule 2 of Form 1040A.

I was under the impression that a Dependent Care Benefit Plan would benefit me, not penalize me with an increase in taxes. How can my employer say they provided a benefit in the total amount of $3,000 in W-2, Block 10 when I had $3,000 in wages set aside for dependent care benefits?

The actual mechanism for this type of plan is an agreement to voluntarily reduce your salary in return for an employer-provided fringe benefit. These plans must be set up this way because you have a choice of whether to receive the cash wages or the benefits, which would make the benefit taxable to you. Therefore, the benefits are actually employer provided or funded. You are receiving a tax benefit because you are not paying taxes on the money that is set aside.

How do I complete Form 2441 if I have flexible Spending Account?

You must complete Part III of Form 2441 (PDF), Child and Dependent Care Expenses, (or Form 1040A, Schedule 2 (PDF), Child and Dependent Care Expenses for Form 1040A Filers) to claim the exclusion of the benefits from income even if you cannot claim the credit. Enter your total employer-provided dependent care benefits on line 14 (this amount should appear in box 10 of your Form W-2) and your qualified expenses on line 17. The last six lines of Part III will determine whether you can also take the credit and what your dollar limit is on qualified expenses. Also complete Part I, Persons or Organizations Who Provided the Care.