Expanded tax help in covering child care costs during coronavirus closure rules
Tuesday, May 12, 2020
The child care workplace benefit, as well as medical ones, are enhanced under two just-issued Internal Revenue Service notices. If your job doesn't offer child care benefits, you might be able to get other tax help in taking care of your youngsters via a tax credit.
Earlier this year as the coronavirus was surreptitiously infecting Americans, lots of parents were going about their usual business, which included making summer plans for their children.
They knew that they needed to get applications to day camps well before school was out so their youngsters would be entertained and supervised once school was out, but mom and dad still were at work.
Then COVID-19 erupted in full force. By mid-March much of the United States was under stay-home orders. People who didn't lose their jobs started working from home. They also started home schooling their kids as traditional educational institutions closed, too.
Now, after weeks (and weeks and weeks) of family togetherness, parents and children alike are looking for a break. In cases where summer day camps used to be routine, they're wondering if conditions will be safe enough — and parents comfortable enough — to send the kiddos there for a few hours each day in the coming months.
And parents who typically use workplace a flexible spending account (FSA) to cover child care expenses, including summer day camp costs, also are worrying about that money.
Take a breath mom and dad. The Internal Revenue Service some good news. No, not about your day camp plans, but about your FSA money.
Temporary changes announced today extend the claims period for dependent care and health FSAs, as well as bump up the potential roll over amount in medical accounts. The IRS also is allowing taxpayers to make mid-year changes to their workplace benefits.
Usual FSA rules: Flexible spending accounts are workplace-provided ways to stash pre-tax cash to pay for medical and dependent care costs. They also are valuable benefits for workers.
But they have one major drawback. If you don't use the money during the tax year, you lose the money.
Yes, many companies allow workers a grace period. They have until March 15 of the following year to use the funds. And yes, other workplaces allow for personnel to roll over some FSA funds.
Such flexibility is welcome since family needs tend to change.
And this year, the change has been momentous. COVID-19 has majorly disrupted the planned use of these accounts, just like it has everything else.
Now unneeded care FSA funds: Because parents were home with their kids due to the closure of offices and schools, post-class day care programs also shut down.
Now there may not be any summer day camps either.
Given the financial issues, most folks aren't complaining about not having to spend that money. But those with dependent care FSAs are worried about losing those funds since they don't have expenses that need to be reimbursed.
The IRS recognizes this in Notice 2000-29, noting that the COVID-19 public health emergency created unanticipated changes in the availability of certain medical care and dependent care. This means more employees may end up with unused amounts in health FSAs and dependent care assistance program amounts at the end of the plan year or even a grace period.
In the notice, the IRS is allowing these account owners more time to use health or dependent care assistance amounts.
Specifically, the IRS is extending claims periods for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits through Dec. 31, 2020.
Mid-year changes now OK: The IRS also is expanding the ability of taxpayers to make mid-year elections for health coverage, health FSAs and dependent care assistance programs. This should allow them to address needs that have changed as a result of COVID-19.
Specifically, the IRS says that companies can allow workers who participate in certain employer-provided benefits to:
- make a new election for workplace health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
- revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis, including changing enrollment from self-only coverage to family coverage;
- revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer;
- revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis; and
- revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
Note number 5 if you have a child care account. You now can decrease your current dependent care spending account amount if, for example, you don't need the money to cover your son's or daughter's summer recreational activity since COVID-19 has forced their day camp to cancel.
Medical benefits enhancements: In a separate official piece of guidance, the IRS also addressed how much can be carried over in a medical FSA from one year into part of the next one.
IRS Notice 2000-33 says that a company that offers workers such rollovers now can increase the allowable amount from $500 to a maximum of $550. This will be adjusted annually for inflation.
The $50 hike isn't much, but it does offer a bit more in these accounts that you don't have to worry about losing.
In addition, the added to some previous pandemic prompted enhancements to high deductible health plans. The agency says the relief it granted earlier allowing these plans and their associated health savings accounts (HSAs) to cover coronavirus-related expenses, including a temporary exemption for telehealth services, is retroactive for qualifying treatments to Jan. 1, 2020.
Allowed, not mandated: One other key factor to note is that the IRS guidance in these two notices allows employers who provide workplace benefits, generally referred to as cafeteria plans since workers get to pick from a variety of options, to make the new, more liberal usage changes.
It does not, however, require any workplace to do so.
However, since employer benefits are a big draw, companies tend to provide what the IRS will allow. Workers like their workplace benefits and enhancing them is a relatively hassle-free and cost-effective way to make and keep employees happy.
Plus, if the employing company uses a benefits firms to set up and administer FSAs etc., the boss doesn't have to hassle with the changes directly.
If you need to adjust your workplace benefits in the ways now allowed in the latest IRS notices, check with your company about whether the changes will be instituted.
Other child care tax help: If you don't have a work-related child care account or spent more than you put in a care FSA on after-school and IRS-allowable summer activities for your kids while you (and your spouse, if married) work, there's another tax-supported way to help pay those costs.
Use the costs, including those for day camps, to claim the child and dependent care tax credit. You'll have to fill out Form 2441, which is this week's featured Tax Form Tuesday document.
This tax break covers up to $3,000 spent on care for one child or up to $6,000 for the care costs two or more kids. But that's not the amount you can claim. The exact calculation is a percentage, based on your income, of your allowable child care costs.
When all that figuring is done, as shown in the form's section excerpted and displayed above, the maximum allowable child care credit is $1,050 for care of one child or $2,100 for costs related to two or more youngsters.
But at least it's a tax credit, which is a dollar-for-dollar reduction of any tax you owe.
You also might find these items of interest:
- COVID-19 law expands FSA OTC options & ends Rx rule
- 5 ways to use up your FSA by the March 15 grace period
- $500 now can be protected from FSA use-it-or-lose-it rule
|Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.
Unfortunately no. Child care can qualify towards the tax credit, private schooling (if the children are kindergarten or older) does not. We had to do the same as you did.
Similarly, hiring a college student to watch your children learn, make sure they can log in to zoom, etc. is child care. Hiring a student majoring in education or a teaching student who is going to also tutor, help your children learn technically is not.
So we allegedly value education for our children but only allow non-education childcare as deductible even when public schools are virtual. It makes no sense. The NEA lobby is strong. Possibly calls to Senators, Congresspersons, state representatives could someday make a difference?
Rebecca (Attorney with LL.M. in Taxation)
Posted by: Rebecca | Sunday, December 20, 2020 at 09:04 PM
I have two children and have to go to work. After our school did not open I had to find day care. I found a private school that was a lot cheaper than day care centers. Will I be able to write off as child care on my taxes due to Covid closure of public schools?
Posted by: Marsha Flath | Wednesday, December 16, 2020 at 11:41 AM