3626 / What exclusion is available for employee participants in an employer-sponsored dependent care assistance program?
An employee may exclude up to $5,000 paid or incurred by the employer for dependent care assistance provided during a tax year.1 For a married individual filing separately, the excludable amount is limited to $2,500. Furthermore, the amount excluded cannot exceed the earned income of an unmarried employee or the lesser of the earned income of a married employee or the earned income of the employee’s spouse.2
An employee cannot exclude from gross income any amount paid to an individual with respect to whom the employee or the employee’s spouse was entitled to take a personal exemption deduction under IRC Section 151(c) (prior to the suspension of the personal exemption from 2018-2025) or who is a child of the employee under 19 years of age at the close of the taxable year.3 Additionally, the employee cannot reimburse the child's other parent for child care provided to their qualifying child.
With respect to on-site facilities, the amount of dependent care assistance excluded is based on utilization by a dependent and the value of the services provided with respect to that dependent.4
1. IRC § 129(a). The dependent care maximum limit is set by federal statute. It is not subject to inflation-related adjustments as many other benefits. The limits have not been raised in several years.