Monday, March 12, 2012

Section 129 Dependent Care Assistance Exclusion DCAP

What is the § 129 Dependent Care Assistance Exclusion

§ 129 (DCAP) of the internal revenue codes provides an exclusion for “dependent care assistance” received by an employee from his employer, if the employer has a qualifying “dependent care assistance program" in place. There is a $5,000 cap on the employer's DCAP program and the amount that an employee can take advantage of the program.

For corporate cash re-imbursements, the employee must take a pay cut equal to an amount under $5,000 and then submits childcare receipts to his employer. While amounts received as salary would have been taxable, amounts received instead of a cash salary under a DCAP are tax-free. This could save the taxpayer significant sums of money depending on which tax bracket that he is in.

A taxpayer cannot use the same dollars or child care expenses to generate both an exclusion under the Dependent Care Assistance Program and a credit under § 21.

More Specifically, § 129(e)(7) provides that an expenditure used to support an exclusion under § 129 cannot be the basis of a credit under § 21. However, a taxpayer whose employer offers DCAP benefits can choose between the benefits of § 129 and the benefits of § 21 child care credit.

The choice is available for up $5,000 of qualifying expenses.  Because of the higher cap on the § 21 credit, even taxpayers who maximize their § 129 exclusion may claim a $1,000 credit under § 21, assuming that they have at least two qualifying children and at least $6,000 of qualifying expenses.

This exclusion applies only under a specific program that satisfies the specific requirements of requirement.

For additional information, please see IRS Publication 15-B (2012), Employer's Tax Guide to Fringe Benefits

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