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Stupid Tax Code – Part I October 26, 2006

Posted by federalist in Taxation.
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If you buy your own healthcare, you do so with after-tax dollars.  But a business that employs you can buy it for you with pre-tax dollars.

If you buy your own childcare, you do so with after-tax dollars.  Can an employer buy you childcare with pre-tax dollars?  It appears that the intent of the tax code is to restrict such a possibility.  But it seems easy to get around this if your employer hires you an “assistant.”

First, to clarify: If you are employed you can actually exempt up to $5000 a year on childcare from taxation.  This applies whether you pay for the service, or whether you seek reimbursement through an untaxed “Flexible Spending Account” or “Cafeteria Plan” sponsored by your employer.  In every case, however, the tax code (section 129) seems to limit the tax-exempt childcare spending to $5000 per year.  How did the tax code authors decide on that limit?  Written questions to my federal representatives and to the IRS asking about this have gone unanswered (our tax dollars at work!).

Of course, if you require fulltime childcare to work $5000 will not get you very far into the year!  But consider: An employer can hire you a personal assistant to take care of matters that would get in the way of your job.  Typically this is done only for high-level executives, but when it is done the cost of the assistant is not taxable to the employee.  Therefore, if you are working and paying for fulltime childcare you should arrange to have your employer hire your care provider as your assistant.  No matter that the “assistance” consists of taking care of your kids.  Let your employer reduce your direct pay accordingly: you will save plenty of money because the childcare is now fully purchased with pre-tax dollars.

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