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Nagel: Tax strategies can ease burden of child care expenses

With school out for the summer, many working parents with additional expenses for summer camps, daycare, or household help should be aware of possible tax savings by claiming the Child and Dependent Care Tax Credit.

What is the Child and Dependent Care Tax Credit? The CDCTC allows taxpayers to claim a credit for a percentage of dependent care expenses paid. The maximum CDCTC is $3,000 for taxpayers with one qualifying individual, and $6,000 for taxpayers with two or more qualifying individuals. The credit ranges from 20 percent to 35 percent of qualified expenses, with a maximum credit of 20 percent for taxpayers with adjusted gross income more than $43,000, and a maximum credit of 35 percent for taxpayers with annual adjusted gross income less than $15,000. 

Qualifying for CDCTC: There are five requirements that a person can follow to be eligible for the tax credit. One requirement for the CDCTC is that the care is for a qualifying person. A qualifying person is the taxpayer’s qualifying child younger than age 13 whom the taxpayer can claim as a dependent. Another qualifying person is if the taxpayer’s dependent is physically or mentally incapable of caring for himself and has the same principal place of abode as the taxpayer for over the tax year. If a taxpayer is divorced or separated, only the custodial parent is eligible for the credit.

The second requirement is the taxpayers must have earned income. The CDCTC can be a bit complex because the qualifying expenses are limited to the earned income of either the taxpayer or spouse, whichever is less. However, if one spouse is a full-time student or disabled, earned income is deemed to be at least $250 a month with one qualifying individual or $500 a month with two or more qualifying individuals 

Earned income includes wages, salaries, tips, and taxable union strike benefits, long-term disability benefits, net earnings from self-employment and nontaxable combat pay. Income not considered as earned includes penal institution pay for inmates, interest and dividends, retirement income, social security, unemployment benefits, alimony and child support. 

The third requirement is that the expenses paid are to allow the taxpayer to work, look for work or go to school. An interesting issue is if one parent is working during the day and the other is working at night, which creates the problem of sleeping or taking care of the children. Fortunately, the IRS will allow qualifying expenses to take care of the qualifying persons so parents can sleep. 

The fourth requirement is that the child or dependent care expenses are for qualifying expenses. Qualifying expenses include fees paid to dependent care centers, expenses of nurseries or preschools that are below the level of kindergarten, day camp fees, and pay to household workers if partly for the well-being and protection of a qualifying individual. Qualifying expenses paid may not be to the taxpayer’s spouse, the parent of the taxpayer’s under-age 13 qualifying child, a person the taxpayer can claim as  a dependent, or the taxpayer’s child who is under the age 19 at the end of the year. 

The last requirement for the CDCTC is that the care provider’s employer identification number or social security number needs to be included on the tax return to claim the credit.

If you think you will exceed the maximum CDCTC for the year, you may want to postpone paying end of the year qualifying expenses until next year. Postponing may allow you to apply the qualifying expenses to the next CDCTC. 

Ask if your employer offers dependent-care benefit plans that you may elect to exclude up to $5,000 from gross income. The plan may be paid with employee’s pre-tax earning, paid with employer contributions or the value of an employer-sponsored day care facility. However, the dollar limit on expenses eligible for the child and dependent care credit is reduced by the tax-free benefits. 

Consider that your babysitters, caretakers, drivers, health aides, nannies and private nurses may be considered household employees. A worker is generally an employee if the homeowner can control not only what work is done, but also how the work is done. Typically a household employee is provided all the necessary tools and supplies, and does not provide services to the general public as an independent business. If your household worker is considered your household employee you may be subject to additional tax and reporting requirements. 

IRS Publication 926, Household Employer’s Tax Guide, and IRS Publication 503, Child and Dependent Care Expenses, were used as references for this column. This is only a brief overview of the child and dependent care tax credit. Consult a tax professional for advice related to your specific situation.

• Kenneth E. Nagel, LMAS, is a tax consultant with Caufield & Flood. He can be reached at 815-455-9538, kennethn@cfcpas.com or via cfcpas.com.

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