Dependent Care Assistance
Posted on September 6, 2008
Filed Under Exclusions, Federal Income Tax
Like the adoption credit, the dependent care credit has a mirror image, namely, an exclusion from income for employer-provided dependent care assistance. Payments or reimbursements qualify for the exclusion only if governed by a written, nondiscriminatory dependent care assistance program.
A nondiscriminatory program is one that doesn’t favor highly compensated employees. However, if the dependent care assistance program discriminates in favor of highly compensated employees yet provides benefits to all workers, it is possible to obtain a positive ruling as to the existence of a legitimate program but only for lower-earning employees.
For those filing joint returns, there is a $5,000 maximum exclusion ($2,500 for married filing separately) for (1) employer-provided dependent care assistance or (2) taxpayer’s contributions to a pre-tax dependent care spending account. In any event, the exclusion cannot exceed the taxpayer’s earned income, or, in the case of joint filers, the earned income of the lower-earning spouse. But if taxpayer’s spouse doesn’t work, there is no exclusion unless the nonworking spouse is a full-time student or disabled. Any assistance in excess of these limits is not eligible for exclusion even if payments for current year services are received in a subsequent tax year.
Expenses do not qualify for the dependent care exclusion if paid to (1) a person the taxpayer can claim as a dependent, (2) taxpayer’s spouse, or (3) taxpayer’s child who is under age 19 at the end of the tax year. In addition, no exclusion is allowed for the cost of sending a child or other dependent to an overnight camp.
In order to prevent a double benefit, any employer payments or employee pre-tax contributions to a flexible spending account reduce dollar-for-dollar the amount of the available dependent care credit.
Given that the remaining definitions and requirements for the dependent care exclusion and credit are alike, the reader is asked to click on dependent care credit for a full discussion.
Additional relevant articles on the topic of dependent care assistance are listed below:
Many happy returns, Roger
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