Dependent Care Tax Benefits: A Sham and a Scam
12 Pages Posted: 2 Jan 2010
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.
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