September 24, 2021

The IRS has issued guidance on the taxability of dependent care tax assistance programs for 2021 and 2022. In the guidance, it was clarified that any amounts that were attributable to carryovers or an extended period for incurring claims would typically be non-taxable events. In addition, under the American Rescue Plan Act, the new guidance has mandated a one-year increase in the exclusion for employer-provided dependent care benefits from $5,000 to $10,500 for the 2021 tax year.

Due to the ongoing pandemic in 2020 and 2021, individuals were unable to use the money that they had previously set aside in their dependent care assistance programs. Under these plans, an employer typically allows employees to set aside a certain amount of pre-tax wages in order to pay for any dependent care expenses they may have.

In most cases, carryovers of unused dependent care assistance program amounts are not allowed. However, because of legislation related to coronavirus such as the Taxpayer Certainty and the Disaster Tax Relief Act of 2020, employers are allowed to change their plans and can now permit the carryover of unused dependent care assistance program amounts to plan years ending in 2021 and 2022.

Notice 2021-26 states that dependent care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable). These benefits will remain excludible from gross income and are not considered wages of the employee for 2021 and 2022.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.