Dependent Care Tax Benefits: A Sham and a Scam

12 Pages Posted: 2 Jan 2010

See all articles by Katherine D. Black

Katherine D. Black

Utah Valley University

Sheldon R. Smith

Utah Valley University - Department of Accounting

Date Written: October 9, 2006

Abstract

In this article, they discuss dependent care tax benefits. IRC section 29 provides for an exclusion from gross income of up to $5,000 for dependent care services. IRC section 21 provides for a credit for those same types of expenditures. The tax credit is a sham for some low-income taxpayers because many of them will get little or no effective benefit from it. For some other low-income taxpayers, the credit is available and provides more advantage than the exclusion. High-income taxpayers benefit more from the exclusion than from the credit but can only qualify for the exclusion if, due to nondiscrimination rules, they can convince a number of low-income taxpayers to participate in the employer’s plan. This creates a conflict of interest for high-income owner-employees who want to encourage low-income employees to participate in the employer’s dependent care assistance plan but for whom the resulting exclusion would be less than the related credit.

Suggested Citation

Black, Katherine D. and Smith, Sheldon R., Dependent Care Tax Benefits: A Sham and a Scam (October 9, 2006). Tax Notes, October 2006, Available at SSRN: https://ssrn.com/abstract=1530268

Katherine D. Black (Contact Author)

Utah Valley University ( email )

800 West University Parkway
Orem, UT 84058-5999
United States

Sheldon R. Smith

Utah Valley University - Department of Accounting ( email )

800 West University Parkway
Orem, UT 84058
United States
801-863-6153 (Phone)
801-863-8060 (Fax)

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