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Dependant Care Tax Benefits a Second Look

Current federal tax law includes two possible benefits for people who need to pay dependent care costs to make employment possible. One is a dependent care tax credit and the other is an exclusion from income for employer-paid dependent care costs. Our previous Tax Notes article focused on these dependent care tax benefits. One conclusion of that article is that the wording of the tax code with respect to the credit offers benefits which may not actually be available for low-income taxpayers. Another conclusion is that low-income taxpayers may be encouraged by employers to participate in an employer dependent care assistance program even though they might be better off with the credit than the exclusion.Although the conclusions reached were appropriate based on the analysis provided, additional analysis is needed, especially with respect to the second conclusion. The reason additional analysis is needed is that some simplifying assumptions were made in the prior article. Fewer simplifying assumptions are made in this article, making the analysis more realistic and providing some interesting conclusions that need to be noted. The stark results presented indicate a need for appropriate consideration to changes in tax laws.