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Your employer can provide you with a substantial amount of dependent care assistance as a nontaxable fringe benefit. However, it must meet certain criteria.
From the employee's standpoint, the most important requirement is probably the fact that the amount of tax-free assistance is limited to $5,000 a year per family, or to the total amount of the lower-paid spouse's salary, whichever is lower. If one spouse is totally disabled or a student, that spouse is treated as earning $200 per month for one dependent, or $400 per month for two.
Unlike the child and dependent care credit, employer-provided dependent care can be claimed by a married couple filing separately. In that case the maximum dollar limit is $2,500 per spouse. Only the spouse whose employer provides assistance can claim the exclusion; if both spouses' employers provide assistance, they can each claim $2,500.
Rules for tax credit apply. The kinds of dependents and expenses that may be covered by an employer's dependent care plan are the same as those that would qualify for the tax credit for child and dependent care. So, the rules relating to keeping up a home for at least one qualifying individual, the earned income test, the work-related expenses test, and the other rules for the tax credit all apply to the employer-provided assistance.