Company ABC provides a dependent care assistance flexible spending arrangement to its employees through a cafeteria plan. In addition, it provides occasional on-site dependent care to its employees at no cost. Emily, a single filing taxpayer and an employee of Company ABC, had $4,500 deducted from her pay for the dependent care flexible spending arrangement. In addition, Emily used the on-site dependent care several times. The fair market value of the on-site care was $700. Emily's Form W-2 should report $5,200 of dependent care assistance in Box 10. If all other conditions are met, what is the maximum amount excludable from gross income for the dependent care expenses Emily can report on her tax return

Company ABC and Emily, a single filing taxpayer

The maximum amount excludable from Emily's gross income for the dependent care expenses, which Emily can report on her tax return is $3,000.

Explanation:

a) Data and Calculations for Emily:

Dependent care flexible spending arrangement deduction = $4,500

Fair market value of the on-site dependent care used = $700

Form W-2 reported dependent care assistance = $5,200

Maximum amount excludable from Emily's gross income for the dependent care expenses Emily can report on her tax return is $3,000.

b) According to the IRS records, Emily can exclude or deduct dependent care benefits provided by a dependent care benefit plan, an amount not exceeding $3,000 if one qualifying person was cared for or $6,000 if two or more qualifying persons were cared for.  Since the number of persons cared for is not disclosed, it is assumed that Emily cared for only one qualifying person.  Therefore, $3,000 is the maximum she is allowed to deduct.

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