The Dependent Care Assistance Plan is a vehicle through which you can accumulate pre-tax funds to reimburse yourself for childcare expenses or day care expenses for a disabled dependent while you are employed. If you are married, you generally will not be able to receive benefits unless your spouse is employed, a full-time student, or disabled.

In order for a dependent care expense to be reimbursable, the expenses must be incurred in order to enable you to remain gainfully employed, and you must include the dependent care provider's Social Security Number if services are provided by an individual or the provider's Tax ID Number if a day care center of any type is used.

In order to participate in the Dependent Care Assistance Plan, you need to estimate what your annual expenses will be for dependent care. Then, set aside that amount from your income by indicating on the Enrollment Form how much you wish to have credited each pay period to the Dependent Care Assistance Plan. It is important to note that depending on your tax bracket, paying for dependent care expenses with pretax dollars through a Dependent Care Assistance Plan may provide substantial tax savings! You should compare the tax benefits of this account to the dependent care tax credit currently permitted under the law.

The dependent care expenses which are eligible for reimbursement include services provided for: a dependent who is under the age of 13 (i.e. age 12 and under); a dependent who is physically or mentally incapable of caring for him/herself; or your spouse, if he/she is physically or mentally incapable of taking care of him or herself.

You MAY NOT include the cost of schooling / tuition or the expenses for sending your child to an overnight camp. You will not be reimbursed for dependent care expenses paid to one of your dependents, your spouse, or one of your children who is under the age of 19.

The IRS released an information letter on September 7, 2000 that responded to inquiries regarding whether expenses for kindergarten qualify for the dependent care tax credit under Code § 21. In this declaration, the IRS confirmed that only expenses that are primarily for custodial care qualify for the credit, and that kindergarten expenses are generally for education, not custodial care. The IRS conceded that Treas. Reg. § 1.44A-1, which discusses eligible dependent care expenses, does not specifically mention kindergarten. However, the regulations do provide that for expenses to be considered for the care of a qualifying individual, their primary purpose must be to ensure the individual's "well-being and protection." Amounts paid for kindergarten are primarily for education, and not primarily for one's well-being and protection. The IRS added that it was not enough that many parents send their children to kindergarten because they need some care arrangement in order to be able to work. A program must still be primarily for custodial care, not education, in order to qualify as an employment-related expense for the dependent care credit.

To illustrate how kindergarten is treated differently than programs that are primarily custodial, the IRS provides the example of a child who attends kindergarten in the morning or an after-school daycare program in the afternoon. The IRS concluded that the portion of the cost for the kindergarten must be separated from the cost of the after-school care, and that only the cost for the after-school care could be applied toward the credit.

Click Here
Publication 503

Download Adobe Acrobat
(Some of these links require Adobe Acrobat to open)