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Dependent Care Accounts

 

NEWS: House Passes Bill Allowing More Child Care Savings Jun-23-2004 - The House passed a bill that would allow families to keep unspent money they saved that year in tax-free child care accounts. H.R. 4372, the "Working Families Assistance Act of 2004," would apply to taxable years beginning after Dec. 31, 2003.  H.R. 4372 joins H.R. 4279, which the House passed earlier this year, to provide for the disposition of unused health benefits in cafeteria plans and FSAs. Both measures are now before the Senate. If enacted, they would force a fundamental change in how dependent care and health FSAs are administered, as participants are currently prohibited from carrying over any unspent moneys into the next plan year. Currently, employees have to give up any money that remains unspent in their flexible spending accounts at the end of the year. Under the bill, passed by voice vote, families will be able to roll over up to $500 in unused child care savings to the next year. "These accounts are not being utilized to their full extent," said U.S. Rep. Eric Cantor, R-Va. He said the "use it or lose it" rule hurts families who could use the roll-over benefit to ensure their child care bills can be paid. U.S. Rep. Benjamin Cardin, D-Md., said Congress should do more to help people care for children and dependent adults. The bill corrects a flaw in the existing system, however. "You have to determine in a year how much money you are going to spend," he said. "If you put in too much money, you are going to lose that money." The money in flexible spending accounts can be used to pay for care for disabled spouses, parents or dependent adults. Earlier this year, the House passed a similar bill allowing employees to roll over to the next year up to $500 in unused money set aside in flexible spending accounts for health care. 

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Although the Dependent Care Tax Credit has increased for 2003, most employees will still usually receive a greater tax benefit by participating in their employer's DCAP--but not always.

The IRS has released Form 2441 ("Child and Dependent Care Expenses"), and its accompanying Instructions, for the 2003 tax year. Form 2441 is a dual purpose form: it is filed with Form 1040 to determine the amount of the dependent care tax credit available under Code Section 21, and it is used by the taxpayer to explain to the IRS why the amounts in Box 10 of the W-2 (the value of employer-provided dependent care benefits under Code Section 129--DCAP benefits) are not taxable. Form 1040A (Schedule 2) is the abbreviated version of Form 2441 used by taxpayers that file the short form 1040A. It too has been updated.

The revised Forms 2441 and 1040A (Schedule 2) reflect the increases made to the Dependent Care Tax Credit (DCTC) by EGTRRA. For 2003, a taxpayer will be able to take into account $3,000 (formerly $2,400) of employment-related dependent care expenses for one qualifying person and $6,000 (formerly $4,800) for two or more qualifying persons. Also increasing are the applicable percentages of dependent care expenses that can be taken into account for the DCTC (which vary depending on income level). The new maximum percentage of 35% (formerly 30%) will be available for taxpayers with adjusted gross incomes of $15,000 or less. The minimum percentage of 20% is now applicable to taxpayers with incomes over $43,000. In addition, the instructions to the revised Forms reflect the increase in the amount of "deemed income" for a spouse who is a student or who is incapable of self-care to $250 per month ($500 for more than one qualifying individual).

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