Category: Deductions & Credits; Individuals Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com The taxpayer (TP) is an executive with a large corporation which provides a cafeteria plan pursuant to IRC §125. The plan provides, among other things, payments for child care through a salary reduction arrangement. TP has opted for around $5,000 of cafeteria benefits to be expended for child care. TP has expended around $11,000 for child care in total. The issue is whether the child care credit can be claimed on the difference between the actual expenditures for child care and the amount of expenses from the cafeteria plan. In other words, can TP claim child care credit on his net out-of-pocket child care expenses? The law clearly prohibits claiming credit in the situation set forth above. IRC §21(c) provides that the maximum amounts against which child care credit can be claimed are reduced by any amounts excluded from income under §129. The maximum amounts referred to are $2,400 for one child or $4,800 for two or more children. Thus, reduction of the maximum amount of $4,800 by the $5,000 cafeteria plan amount leaves TP with no basis upon which to take credit. It makes no difference whether the employer provides an incremental benefit for child care reimbursement or the expenses are handled through a salary reduction arrangement. It is the employee's exclusion, not the source of the funds, that triggers a reduction of the maximum amounts against which credit can be claimed. The language of §21(c) looks a little peculiar in that it only explicitly requires reductions for amounts excluded under employer child care plans pursuant to §129. There is no mention of child care benefits paid under §125. On the surface, the fact that §129(c) does not explicitly mention §125 plans might indicate that reimbursements under §125 plans should somehow be exempt from the anti-double-dipping rule of §129(c). However, closer examination of the related statutes indicates otherwise. §125 does not by itself provide exclusion from income for employer provided benefits. The role of §125 is to prevent income inclusion solely because the employee can choose between two or more qualified benefits. A benefit is qualified under §125 if the benefit is excludable under some other provision of law. In the case of child care, the other provision is obviously §129. Accordingly, there is a symbiotic relationship between §§129 and 125 such that any child care benefits paid under §125 are deemed to flow from §129. As such it is unnecessary for §21(c) to explicitly mention §125. |
