Wednesday, April 23, 2014

Child and Dependent Care Credit

The Child and Dependent Care Credit is a nonrefundable tax credit based on expenses incurred for the care of a qualifying person. This care must make it possible for you to work or to seek employment. This credit is based on a percentage of the amount actually paid for care expenses.

Requirements to Claim Credit

  • You and your spouse, if married, must have earned income during the year.
  • You pay the care expenses so you and your spouse, if married, can work or seek employment.
  • You make the care payments to someone you cannot claim as a dependent, and who is not your spouse or a parent of the child.
  • Your filing status is single, head of household, qualifying widow(er) with dependent child, or married filing jointly.
  • You are able to identify the person providing the child or dependent care.

Qualifying Expenses

Qualifying expenses are incurred for the well-being and protection of a qualifying person. The expenses must be to provide care for a qualifying person and must be work-related. Work-related care expenses are defined as expenses incurred for the care of the qualifying person while you are working or looking for work.

If you are married, both you and your spouse must work or look for work.  For more information see Earned Income

Qualifying expenses include:

  • Household services, including babysitting, nursery, housekeeping, and other services that are ordinary and usual if they are at least partly for the care of a qualifying person
  • Expenses related to sending a child to an educational program, if the child is below first grade. Educational programs include nursery school, preschool, or similar programs.
  • Payments to relatives who are not your dependent and are over the age of 19, not your spouse, and are not the parent of the qualifying person, and the qualifying person is under age 13. Even if the person providing the care is living with you, the expenses qualify if the above requirements are met.

Non-Qualifying Expenses

  • The cost of transporting the qualifying person from your home to the care location and back.
  • The cost of sending the qualifying person to overnight camp.
  • Expenses related to food, clothing, education, and entertainment. However, if these expenses are small amounts and cannot be separated from the cost of caring for the qualifying person, these expenses may be included.

Qualifying Person

  • A dependent is a person, other than you or your spouse, for whom you claim an exemption and who is a qualifying child or qualifying relative.
  • The qualifying person must be under the age 13 or disabled.
  • A person who cannot dress, clean, or feed themselves due to mental or physical problems, or a person who must have constant attention to prevent them from injuring themselves or others.
  • The child or dependent for whom the credit is claimed must be identified by a taxpayer identification number. This number is generally a Social Security Number, but an Individual Taxpayer Identification Number or Adoption Taxpayer Identification Number may be substituted.

Earned Income

For purposes of the Child and Dependent Care Credit, earned income includes:

  • Wages
  • Salaries
  • Tips
  • Other taxable employee compensation
  • Net earnings from self-employment
  • Disability pay reported as wages
  • Parsonage allowances
  • Meals and lodging furnished for the convenience of the employer
  • Voluntary salary deferrals
  • Military pay earned in a combat zone

A spouse is treated as having earned income for any month he or she is a full-time student or is physically or mentally unable to care for himself or herself.

A student is considered full time if they are enrolled and attend school for the number of hours or classes the school considers full time. You must have been a student for some part of five calendar months during the year. "School" includes elementary, junior and senior high schools, colleges, universities, technical, trade, and mechanic schools. Schools offering courses only through the Internet are not considered a "school" for this credit.

Provider Identification

All persons or organizations providing child or dependent care must be identifiable. In order to identify the care provider you must supply the provider's name, address and taxpayer identification number.

If the provider is an individual, his or her Social Security Number or Individual Taxpayer Identification Number is acceptable.

If the provider is an organization, the Employer Identification Number (EIN) is acceptable.

If the provider is a tax-exempt organization (church, school, etc.), it is not necessary  to provide identification - you may enter "TAX-EXEMPT" in place of the identifying number on Form 2441.

If you cannot provide all of the information or the information is not correct, you must provide proof of due diligence. For the purpose of provider identification, due diligence can be shown by obtaining and keeping the provider's completed Form W-10, a copy of the provider's Social Security card, driver's license (if it includes the Social Security Number), Form W-4 (if the person is a household employee), or a letter or invoice from the provider showing the necessary information.

If the provider refuses to supply you with identification information, you should report the information you can obtain at the bottom of the form you use to claim the credit (Form 2441). On the bottom of the second page of Form 2441, explain the information was requested but refused by the provider.

Limitations of Credit

Child and dependent care expenses are limited to $3,000 for one qualifying person, and $6,000 for two or more qualifying persons.

The total child and dependent care expenses claimed cannot exceed your total earned income for the year.

The credit is equal to 35% of the maximum qualifying child and dependent care expenses. This rate is reduced by 1% for each $2,000 your adjusted gross income exceeds $15,000, but is not reduced below 20%.

The total child and dependent care expenses claimed must be reduced by Dependent Care Benefits you received from your employer. Employer-provided Dependent Care Benefits are reported in box 10 on Form W-2.

To claim the credit, complete Form 2441 and attach the form to your Form 1040 or Form 1040A.

For more information see IRS Publication 503.


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