Tax Law and News IRS issues guidance on taxability of dependent care assistance programs for 2021 and 2022 Read the Article Open Share Drawer Share this:Click to share on Twitter (Opens in new window)Click to share on Facebook (Opens in new window)Click to share on LinkedIn (Opens in new window) Written by Intuit Accountants Team Modified May 12, 2021 2 min read The IRS recently 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. The guidance also illustrates the interaction of this standard with the one-year increase in the exclusion for employer-provided dependent care benefits from $5,000 to $10,500 for tax year 2021 taxable under the American Rescue Plan Act (ARPA) of 2021. Because of COVID-19, many people were unable to use the money they set aside in their dependent care assistance programs in 2020 and 2021. Generally, under these plans, an employer allows its employees to set aside a certain amount of pre-tax wages to pay for dependent care expenses. The employee’s expenses are then reimbursed from the dependent care assistance program. Carryovers of unused dependent care assistance program amounts generally are not permitted, although a 2½ month grace period is allowed. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 allowed employers to amend their plans to permit the carryover of unused dependent care assistance program amounts to plan years ending in 2021 and 2022, or to extend the permissible period for incurring claims to plan years over the same period. Notice 2021-26 clarifies for taxpayers that if these dependent care benefits would have been excluded from income if used during tax 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. Notice 2021-15, issued February 2021, states that if an employer adopted a carryover or extended period for incurring claims, the annual limits for dependent care assistance program amounts apply to amounts contributed, not to amounts reimbursed or available for reimbursement in a particular plan or calendar year. Therefore, participants in dependent care assistance programs may continue to contribute the maximum amount to their plans for 2021 and 2022. For more on COVD-19-related tax relief, see IRS.gov, or scan through the COVID-19 articles on the Intuit® Tax Pro Center. Previous Post Child Tax Credit expanded for tax year 2021 Next Post Overview of tax provisions in the American Rescue Plan Act… Written by Intuit Accountants Team The Intuit® Accountants team provides ProConnect™ Tax, Lacerte® Tax, ProSeries® Tax, and add-on software and services to enable workflow for its customers. Visit us at https://proconnect.intuit.com, or follow us on Twitter @IntuitAccts. More from Intuit Accountants Team Comments are closed. Browse Related Articles Tax Law and News New law provides additional flexibility for health FSAs… Tax Law and News All About the Dependent Care Credit Tax Law and News Overview of tax provisions in the American Rescue Plan… Tax Law and News Families get “extra credits” under the Amer… Tax Law and News Top 10 Tax Facts about Exemptions and Dependents Tax Law and News Guidance issued on employer deferral of withholding and… Tax Law and News Tax tips for new parents Tax Law and News American Rescue Plan: Essential insights for individual… Tax Law and News IRS provides guidance for employers claiming the Employ… Tax Law and News Guidance issued on tax relief on deductions for food or…