Small Business Taxes & Management^TM--Copyright 2016, A/N Group, Inc.

Introduction

Tax law provides a credit for child and dependent care expenses. The credit can be as much as $1050 per child, maximum two children for low income taxpayers. The credit percentage drops sharply until it's down to 20% for taxpayers with an AGI of $43,000 or more. Thus, the credit for many taxpayers will be no more than $600 per child with a maximum of two qualifying children resulting in a maximum credit of $1,200. Qualifying expenses limited to $3,000 (one child) or $6,000 two or more children. Worksheets in tax software can provide substantial help.

Qualifying Persons

___ Dependent under age 13 when care provided
___ Spouse physically or mentally unable to care for self; lived with you more than 1/2 year
___ Dependent; physically or mentally unable to care for self
___ Person who would be dependent except for gross income requirement is dependent
___ Physically/mentally unable to care-cannot dress, clean, feed themselves, would injure themselves
___ Partial year qualification
___ TIN of qualifying person
___ Children of divorced or separated parents

Taxpayer's Qualifications

___ Earned income requirement
___ Taxable compensation
___ Election to include combat pay
___ Special rule for student-spouse (full-time) or spouse not able to care for self
___ Full-time student definition
___ Care expense only if allows you (and spouse)to work or look for work
___ Partial year employment
___ Temporary work absence

Qualifying Expenses

___ Day care
___ Dependent care center must comply with all state and local regulations if care for more than six persons; nonprofit no exception
___ Expenses do not include food, lodging, clothing, education, and entertainment (exception for incidental expenses in daycare; not broken out)
___ Nursery school qualifies; kindergarten does not
___ Summer camp qualifies but not if overnight
___ Before- and after-school care
___ Babysitters
___ Household services/housekeeper must be at least partly for well-being of qualifying person
___ Part expenses for work-related/part not, allocation necessary
___ Qualifying expenses of housekeeper-meals and lodging, employment taxes
___ De minimis expenses paid with qualifying
___ Payments to relatives; special rules

Other Points

___ Provider identification (TIN, SSN)
___ Request number on W-10
___ Refusal to provide-attach statement
___ Form 2441; Instructions
___ IRS Publication 503
___ Expenses paid in following year
___ Dollar limit of qualifying expenses
___ Reimbursed expenses
___ Dependent care benefits; W-2
___ Exclusion or deduction; $5,000 ($2,500 married, separate) limit; other limits
___ Marital status; married joint; legally separated; married and living apart

--Last Update 07/28/16