The IRS has issued guidance on the taxability of dependent care assistance programs for 2021 and 2022, clarifying that amounts attributable to carryovers or an extended period for incurring claims generally are not taxable. Dependent care assistance benefits carryovers and extended claims period amounts that would otherwise be excluded from income if used during the preceding tax year remain excludable in tax years ending in 2021 and 2022. In addition, these benefits are not considered in determining the dependent care benefits exclusion limit for the tax years ending in 2021 and 2022.

Dependent Care Assistance Exclusion

Generally, employees may exclude amounts their employer pays or incurs for dependent care assistance benefits if furnished pursuant to a dependent care assistance program. For 2020, the exclusion cannot exceed $5,000, $2,500 if married filing separately (increased for 2021 only to $10,500 and $5,250 if married filing separately). Unused benefits may be used during a 2 ½-month grace period following the plan year’s end. However, if the sum of the benefits used in the tax year (including unused benefits used during a grace period that falls in the tax year) exceeds the limitation, the excess is taxable.

Carryovers and Extensions

Beyond the grace period, carryovers of unused dependent care assistance program amounts generally are not permitted. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 allowed employers to amend their plans to permit carryovers to plan years ending in 2021 and 2022, or to extend the permissible period for incurring claims to plan years over the same period. These benefits remain excludable and are not considered in determining the dependent care benefits exclusion limit for the tax years ending in 2021 and 2022.

To help you determine the taxability of dependent care assistance benefits, feel free to call us. We are here to assist you.

Venkat Iyer. CPA(USA). CPA(Canada). MBA

Venkat holds a CPA credential both in the USA and Canada, and he is very proficient in tax and compliance requirements in both countries. He is a Seasoned Business Adviser with 18+ years of extensive experience in diversified industries and accounting firms.He is also very prominent in implementing Lean Principles and Strong Financial Foundations for Hotels and Restaurants. He believes the key to any business success is knowing their indicators and their impact. He has been helping businesses with predictive analytics, transforming data from their enterprise's system for delivering meaningful insights.He is also a Business Automation Expert helping streamline the workflows from marketing to management to ensure optimal business performance.