IRS weighs in on tax impact from dependent care assistance programs

The Internal Revenue Service has issued guidance on the taxability of dependent care assistance programs (DCAPSs) for 2021 and 2022.

The federal tax agency says that amounts arising from previously issued carryover and extended grace relief are generally not taxable.

If these DCAP benefits would have been excluded from taxable income when used during the 2020 or 2021 taxable years, then the benefits still will not count as gross income and are not considered employee wages for 2021 and 2022.

The IRS notice also clarifies, using a number of examples, 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 the 2021 taxable year under the American Rescue Plan Act.