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Dependent Care Expenses – IRS Issues Final Regulations
On August 14, 2007, the Internal Revenue Service issued final regulations under Internal Revenue Code Revenue Code § 21 regarding dependent care expenses. These final regulation replace proposed regulations that were issued on May 24, 2006. While issued in relation to the dependent care tax credit, these regulations create similar requirements for reimbursement of dependent care expenses under a dependent care Flexible Spending Account (FSA).
These regulations, which were finalized after consideration of taxpayer comments, outline those dependent care expenses that are considered employment-related, i.e., expenses incurred so that both the participant and their spouse (if applicable) can remain gainfully employed. These regulations, as finalized, have no major effect on the way HFS Benefits currently adjudicates dependent care claims.
These final regulations confirm that the following expenses are not eligible expenses:
- Expenses for overnight camps (even if the day care portion can be broken out seperately).
- Expenses for summer school and tutoring programs.
- Expenses for part-time or full-time kindergarten (whether public or private), or any higher grade.
- Expenses for food, education, etc.. not incidental to and inseparably a part of the care provided.
- Expenses incurred by a non-custodial parent.
- Payments to a participant's dependent or spouse, or to the mother of the participant's qualified child.
These final regulations confirm that the following items are eligible expenses (assuming all Code requirements are met):
- Expenses for care in the home, or away from home. (A dependent care center that provides care for six (6) or more indivduals must comply with all state and local laws and regulations.)
- Expenses for dependent care that must be paid while a participant and/or a participant’s spouse are temporarily absent from work due to vacation, sickness, etc.. A temporary absence is defined a an absence that does not exceed two (2) consective calendar weeks.
- Expenses for dependent care incurred where a participant and the participant’s spouse work differing shifts, and the dependent care is required while one spouse is working and the other is sleeping.
- Expenses for day camps, including day camps that specialize in an activity, e.g., computer camps, soccer camps, etc. (A day camp that provides care for six (6) or more indivduals must comply with all state and local laws and regulations.)
- Expenses for a child in nursery school, pre-school or similar program below the kindergarten level.
- Before and after-school care
- Fees paid to obtain care such as application fees, agency fees and deposits (including those to reserve a space) are reimbursable, but only when and if care is actually provided.
- Expenses for transportation provided by a dependent care provider to and from the place where the dependent care is provided.
- Costs for care of a participant’s dependent or spouse that is incapable of self-care and spends at least eight (8) hours a day in the participant’s home
- A caregiver's wages, the additional cost of room and board provided to a caregiver, and employment taxes.
These final regulations are effective as of August 14, 2007.
Click here to view a copy of the proposed regulations.