HR News, Human Resources

BREAKING NEWS: IRS Issues Notice 2021-26 Regarding Taxation of Dependent Care Benefits

Notice 2021-26  addresses the taxation of dependent care benefits provided through a dependent care assistance program (DCAP) that are made available in taxable years ending in 2021 and 2022 due to the application of either the carryover or the extension of a claims period made available under § 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act), enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. 116-260, 134 Stat. 1182 (Dec. 27, 2020) (CAA).

The notice clarifies that if these dependent care benefits would have been excluded from income if used during the taxable year ending in 2020 (or 2021, if applicable), these benefits will remain excludible from gross income and are not wages of the taxpayer for the taxable years ending in 2021 and 2022.

In addition, the notice clarifies that these amounts will not be taken into account for purposes of the application of the limits under § 129 to the other dependent care benefits made available for the taxable years ending in 2021 and 2022.

This is a change from how the § 129 exclusion has been applied to grace period amounts in years prior to the CAA; in those years (and as a continuing general rule), reimbursements of dependent care benefits in excess of the $5,000 statutory amount attributable to a grace period were taxable to recipients

Notice 2021-26, will be published in Internal Revenue Bulletin 2021-21, on May 24, 2021.


Be Audit-Secure™

Lisa Smith, SPHR, SHRM-SCP


Lisa Smith is CEO of Andere Corporation and Chief Content Developer at HelpDeskSuites.com. Follow her on Twitter, connect with her on LinkedIn, listen to her Small Business Spoonfuls Podcast, and find more in her Compliance Warriors Facebook Group.

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