Ineligible Dependent Care FSA

[Life994]

Hi All,

I have my wife and a 3 year old kid as my dependents.

Around September 2005, my wife started looking for a job and got a good offer. Anticipating that she will start working soon, I enrolled in the "Dependent Care FSA (Flexible Spending Account)" at my work to cover from my kid's pre-school expenses. It was a middle of the year enrollment starting from October 1 until December 31. I contributed about $2000 into the plan.

Unfortunately my wife did not get the job and continued looking for employment. The year ended and she never got any job. I have since got reimbursed the $2000 that I contributed in the plan.

However since my wife did not have any earned income during the year, those claims are clearly ineligible. How do I handle this during tax filing? Should I report the $2000 as ordinary income, or is there more to it like penalties etc.?

Thanks

[mjrube94]

You are eligible to receive Dependent Care benefits for the amount of care you needed while your wife looked for work. Check out irs.gov, form 2441 instructions for information about how to reflect the fact that there was no earned income, yet she was looking. (The same applies for people whose spouses are full-time students). Let us know how you make out...