Dependent care benefits are the benefits offered by employers to employees for taking care of dependents, such as disabled members of the family and young children. Dependent care benefits include dependent care tax credits, paid leave for the care of dependents, and flexible spending accounts for dependent care.
As per the Internal Revenue Services (IRS), the benefits related to the care of dependents are tax-exempt; hence, they can be claimed on the tax return. The credit applicable to the dependent care benefits can reduce an individual’s taxable income by hundreds or thousands of dollars. Other than the qualifying children, dependent care benefits can also apply to relatives, partners, and roommates.
Dependent care benefits are the benefits offered by employers to employees for taking care of qualifying dependents.
A child younger than 13 years or a family member who is physically or mentally unfit to take care of himself/herself qualifies as a dependent.
Dependent care benefits offer child and dependent care tax credits and flexible spending accounts to employees to pay for dependent care services.
Dependent Care Benefits – Qualifying Dependents
A person is qualified as a dependent if he/she matches the following criteria:
An employee’s qualifying child or relative who is below 13 years when the care is offered
Spouse of the employee, who is mentally or physically unfit to take care of himself/herself and has lived with the employee for more than six months
Any family member who, mentally or physically, was unable to take care of himself/herself and has lived with the employee for more than six months. The person cannot be considered a dependent if he/she earns an income of $4,200 or more or has filed a joint return.
Various Dependent Care Benefits
1. Child and Dependent Care Tax Credit
If an employee is paying another entity or person to take care of his/her children or another dependent while he/she works, the employee may be eligible for the child and dependent care credit. The credit offsets the costs of taking care of a child or a dependent person with a disability. The primary benefit is that it is a tax credit, not a tax deduction.
A tax deduction reduces the income amount on which tax is to be paid, whereas a tax credit reduces the tax payable. For example, a $1,500 deduction may reduce the tax bill by only $200 or $250, based on the tax bracket. On the contrary, a $1,500 tax credit reduces the tax bill by $1,500.
To qualify for the child and dependent care tax credit, an employee must’ve made payments to someone – like a daycare provider – to take care of one or more dependents.
An employee cannot claim the credit if:
His/her spouse takes care of the dependent
Ex-husband or ex-wife takes care of their child
Any individual listed as a dependent on the employee’s tax return
His/her child takes care of the younger child
2. Dependent Care Flexible Spending
A dependent care flexible spending is an account in which employees get pre-tax benefits. It is a benefit account used to pay for services availed to care for dependents while employees are at work. The payroll taxes are not applied to the money contributed by employees to the dependent care flexible spending account. As a result, the employees pay less and take home more of their income.
The spending account covers a variety of care services, such as programs before and after school, summer day camps, and daycare for children or other dependents. The employees can arrange to either get the funds directly paid to the facility providing care to the dependents or reimburse the eligible expenses later.
The dependent care flexible spending is funded through an employer. During a company’s open enrollment period, an employee informs the employer about his/her contribution amount to his/her account for the year.
The IRS determines the maximum contribution amount, which is set as $5,000 for 2020. The employer then deducts contributions from the paychecks of the employee throughout the year. Any funds remaining at the end of the plan year will be handed over to the employer; hence, employees must carefully plan their contribution amounts.
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