The Foreign Service Journal, January-February 2022

AFSA NEWS 62 JANUARY-FEBRUARY 2022 | THE FOREIGN SERVICE JOURNAL advanced child tax credit payments they received during 2021 when they file their 2021 tax return. Other Dependent Credit. A separate but related Other Dependent Credit of up to $500 is available, often for those who do not meet the qualifying child requirement or for other dependent relatives. Calculate both the child tax credit and the other dependent credit on the Child Tax Credit and Credit for Other Dependents Worksheet. The worksheet and a flow chart for determining “Who Qualifies as Your Dependent?” are in the Form 1040 instructions. AFSA also recommends IRS Publica- tion 5307, Publication 972, the instructions for 2021 Sched- ule 8812, and IRC Sec. 24 for the Child Tax Credit and Other Dependent Credit. Child and Dependent Care Tax Credit . Qualifying taxpay- ers with a qualifying dependent may be separately eligible for a credit for part of their child and dependent care expenses. A qualifying taxpayer is a taxpayer who earned income (not excluded under FEIE), looked for work and obtained work by the end of the tax year, or was a qualifying full-time student during the tax year. Most MFS taxpayers will not qualify. In the case of married taxpayers, both taxpayers must meet at least one of these requirements. For 2021, ARPA increased the dollar limit for child and dependent care qualifying expenses from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals. Taxpayers who utilize a Dependent Care FSAFEDS (DCFSA) account to pay for qualifying dependent care expenses must still file Form 2441 to report that they used the funds for qualifying dependent care. Taxpayers who pay for qualifying expenses greater than the enhanced DCFSA limits allowed (see the next section) can claim a credit on Form 2441 for the excess amounts paid up to the 2021 Form 2441 limits. In addition to changes in the income threshold permitting a higher credit calculation, ARPAmade the child and dependent care credit refundable for taxpayers who have a principal place of abode in the U.S. for more than one-half of 2021. In the case of a joint return, only one taxpayer must meet the U.S. abode requirement. As with the enhanced child tax credit, members of the U.S. Foreign Service who serve abroad for more than one-half of 2021 will not qualify for the refundable portion of this credit unless Congress acts to allow their qualification. However, members of the Foreign Service serving abroad for more than one-half of 2021 can still qualify for the non-refund- able credit. To claim this credit for foreign care providers who do not have a U.S. taxpayer identification number (either a Social Security Number or Employer Identification Number), enter “LAFCP” (Living Abroad Foreign Care Provider) on Form 2441 in the space for the care provider’s taxpayer identification number. AFSA recommends IRS Tax Topic 602, Form 2441 and instructions, as well as Form 1040 Schedule 3 and correspond- ing Form 1040 instructions. For all three credits related to children and dependents, qualifying child rules can quickly become complex, especially in the case of divorce or separation. Health Care Savings Account (HSA) & Flexible Savings Account (FSA) In 2021, taxpayers covered by a self-only high-deductible insurance plan may contribute up to $3,600 to an HSA. Indi- viduals with family high-deductible insurance coverage may contribute up to $7,200 for 2021. HSA 2021 contributions are due by the 2021 individual tax filing deadline (currently April 15, 2022). Distinct from an HSA, an FSA is a tax-advantaged account allowing an employee to contribute pre-tax wages to pay for qualifying medical expenses (as in the case of the Health Care FSAFEDS account) or to pay for qualifying dependent care (as in the case of the DCFSA account). The Consolidation Appropriation Act (CAA) signed by Congress on Dec 27, 2020, permits FSA administrators to allow certain carryover and grace periods for FSA accounts. FSAFEDS has adopted many of these provisions. The Health Care FSAFEDS (HCFSA) allows unlimited carryover for re-enrolled participants for the 2020 and 2021 plan years. To take advantage of these carryover pro- visions, the employee must have re-enrolled in HCFSA during 2020 open enrollment (for the 2021 calendar year) so unspent 2020 funds could be rolled over to 2021. To carry over unspent 2021 funds to the 2022 calendar year, participants must have re-enrolled in HCFSA during open enrollment 2021 (for the 2022 tax year). Prior to the unlimited carryover provisions, only up to $550 of unspent HCFSA funds could be carried forward to the next calendar year. Changes to the DCFSA allowed any unused amounts from the 2020 plan year to be used through Dec. 31, 2021. The 2021 grace period to use unused 2021 funds is extended through Dec. 31, 2022. And DCFSA has adopted the increased contribu- tion limit provided by ARPA, to $10,500 (or $5,250 for qualify- ing MFS), for 2021 only (as of press time). Readers should take note that masks, hand sanitizers and sanitizing wipes used to prevent the spread of COVID-19 are now qualifying expenses for HCFSA funds (per IRS announce- ment 2021-7). Additionally, the CARES Act permanently expanded the definition of qualifying medical expenses to include feminine hygiene products and over-the-counter medi- cations purchased after Dec. 31, 2019. This expanded definition allows taxpayers to withdraw funds from HSAs or FSAs (such as the HCFSA) to pay for these expenses. AFSA recommends Publication 969, the Form 8889 instructions and the FSA Feds website.