According to the IRS, dependent care benefits are frequently reported incorrectly on tax returns. Let’s take an in-depth look at the proper way to report dependent care benefits.
Some employers offer employees a dependent care benefit plan to help cover the cost of child care for dependent children under the age of 13, or for an employee’s spouse or other dependent who is unable to care for himself or herself. An employer’s dependent care benefit plan may include:
1. Paying an amount directly to the employee or the daycare provider;
2. The fair market value of care provided in a daycare facility provided by or sponsored by the employer.
The employer must provide to the employee, an annual statement reporting the amount of dependent care benefits. Generally, amounts up to $5,000 contributed to a qualified plan are reported on the employee’s Form W-2 in Box 10, but are no include as wages in Box 1. However, if the amount of benefit exceeds $5,000, the excess is reported as additional wages in Box 1. Benefits received as a partner in a partnership are reported on Form 1065, Schedule K-1, Box 13, Code O.
An employee receiving dependent care benefits may be able to exclude from income all or a part of the benefit received. The exclusion for dependent care benefits is determined on one of two forms:
1. Form 2441, Child and Dependent Care Expenses, Part III;
2. Form 1040A, Schedule 2.
Taxpayers must meet the following basic tests to receive qualifying dependent care benefits:
1. Qualifying person test;
2. Earned income test;
3. Work-related expense test;
4. Joint return test; and
5. Provider identification test.
For more information on these tests, see Publication 503, Child and Dependent Care Expenses.
The limits for an employer-sponsored dependent care plan are generally $3,000 for one qualifying person and $6,000 for two or more. Dependent care benefit plans have a lower limit of up to $5,000 (or $2,000 if married filing separately). When adhering to these general rules, taxpayers can exclude or deduct amounts received.
When figuring the exclusion or deduction for dependent care benefit plans, the definition of earned income is not exactly the same as the definition used when figuring the credit for child and dependent care expenses. For dependent care benefits, only taxable compensation is included and it does not include any dependent care benefits received. However, a taxpayer can elect to include nontaxable combat pay in earned income. If filing a join return and both taxpayers received nontaxable combat pay, each can make their own election. Be sure to figure the exclusion or deduction both ways and elect the method that yields the greater tax benefit.
Some employers offer employees a dependent care benefit plan to help cover the cost of child care for dependent children under the age of 13, or for an employee’s spouse or other dependent who is unable to care for himself or herself. An employer’s dependent care benefit plan may include:
1. Paying an amount directly to the employee or the daycare provider;
2. The fair market value of care provided in a daycare facility provided by or sponsored by the employer.
The employer must provide to the employee, an annual statement reporting the amount of dependent care benefits. Generally, amounts up to $5,000 contributed to a qualified plan are reported on the employee’s Form W-2 in Box 10, but are no include as wages in Box 1. However, if the amount of benefit exceeds $5,000, the excess is reported as additional wages in Box 1. Benefits received as a partner in a partnership are reported on Form 1065, Schedule K-1, Box 13, Code O.
An employee receiving dependent care benefits may be able to exclude from income all or a part of the benefit received. The exclusion for dependent care benefits is determined on one of two forms:
1. Form 2441, Child and Dependent Care Expenses, Part III;
2. Form 1040A, Schedule 2.
Taxpayers must meet the following basic tests to receive qualifying dependent care benefits:
1. Qualifying person test;
2. Earned income test;
3. Work-related expense test;
4. Joint return test; and
5. Provider identification test.
For more information on these tests, see Publication 503, Child and Dependent Care Expenses.
The limits for an employer-sponsored dependent care plan are generally $3,000 for one qualifying person and $6,000 for two or more. Dependent care benefit plans have a lower limit of up to $5,000 (or $2,000 if married filing separately). When adhering to these general rules, taxpayers can exclude or deduct amounts received.
When figuring the exclusion or deduction for dependent care benefit plans, the definition of earned income is not exactly the same as the definition used when figuring the credit for child and dependent care expenses. For dependent care benefits, only taxable compensation is included and it does not include any dependent care benefits received. However, a taxpayer can elect to include nontaxable combat pay in earned income. If filing a join return and both taxpayers received nontaxable combat pay, each can make their own election. Be sure to figure the exclusion or deduction both ways and elect the method that yields the greater tax benefit.
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