J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

3.5 Dependent Care Assistance

The value of qualifying day-care services provided by your employer under a written, nondiscriminatory plan is generally not taxable up to a limit of $5,000, or $2,500 if you are filing separately. The same tax-free limits apply if you make pre-tax salary deferrals to a flexible spending account for reimbursing dependent care expenses (3.15). However, you may not exclude from income more than your earned income. If you are married and your spouse earns less than you do, your tax-free benefit is limited to his or her earned income. If your spouse does not work, all of your benefits are taxable unless he or she is a full-time student or is disabled. If a full-time student or disabled, your spouse is treated as earning $250 a month if your dependent care expenses are for one dependent, or $500 a month if the expenses are for two or more dependents.

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Caution

Tax-Free Exclusion for Employer-Provided Dependent Care

You cannot assume that your employer-provided dependent care benefit is completely tax free merely because your employer has not included any part of it in Box 1 of Form W-2 as taxable wages. Although up to $5,000 of benefits are generally tax free, the tax-free amount is reduced where you or your spouse earn less than $5,000 or where you file separately from your spouse. You must show the amount of your qualifying dependent ...