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May 10, 2021

New IRS guidance clarifies unused dependent care assistance program funds carried over to 2021 or 2022 won’t be taxed as wages

The IRS has announced (IR-2021-105) new guidance (Notice 2021-26) on the taxability of dependent care assistance programs for 2021 and 2022.  Specifically, the notice clarifies that if unused funds remain in an employee’s dependent care assistance program in 2020 or 2021 because daycare has been limited due to the coronavirus, the funds carried over to plan years ending in 2021 or 2022 will remain excludible from gross income and not considered wages for 2021 or 2022. A Tax Alert is forthcoming.