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It's Almost Summer - Who is Caring For The Kids When You Work?

Article Highlights:

  • Credit For Child Care 
  • Credit Percentage 
  • Child Qualifications 
  • Employment-Related Expense 
  • Taxpayer Earnings Limits 
  • Full-Time-Student or Disabled Spouse 
  • Qualifying Care 
  • State Credit 
It is almost summertime. Have you figured out what to do with the kids while they are out of school and you are at work? There are possibilities that may qualify you for a break in the form of a tax credit that can help offset the cost of care for children. But not all summertime care solutions may qualify for the tax credit, so here is some information that will help you understand how the credit is determined, what kinds of care qualify and possible limitations.

The credit is the percentage of actual care expenses. It can be as high as 35% for lower income taxpayers but is never less than 20% of for higher income taxpayers. The table illustrates credit percentages at various levels of AGI.

AGI
Over
But Not
Over
Applicable
Percent
AGI
Over
But Not
Over
Applicable
Percent
0 15,000 35 29,000 31,000 27
15,000 17,000 34 31,000 33,000 26
17,000 19,000 33 33,000 35,000 25
19,000 21,000 32 35,000 37,000 24
21,000 23,000 31 37,000 39,000 23
23,000 25,000 30 39,000 41,000 22
25,000 27,000 29 41,000 43,000 21
27,000 29,000 28 43,000 No Limit 20

For an expense to qualify for the credit, it must be needed for you and your spouse, if you are married, to work, and it must be for the care of your child, stepchild, foster child, brother, sister or stepsibling (or a descendant of any of these) who is under 13, lives in your home for more than half the year and does not provide more than half of his or her own support for the year. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit.

The qualifying expenses are limited to the income you or your spouse, if married, earn from work, using the figure for whoever earns less. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled.

The qualifying expenses can’t exceed $3,000 per year if you have one qualifying child, while the limit is $6,000 per year for two or more qualifying persons. This limit does not need to be divided equally. For example, if you have paid and incurred $2,500 of qualified expenses for the care of one child and $3,500 for the care of another child, you can use the total, $6,000, to figure the credit. The credit is computed as a percentage of your qualifying expenses from the table above—in most cases, 20%.

Example: Al and Janice both work, each with earned income in excess of $40,000 per year. Janice has a part-time job, and her work hours coincide with the school hours of their 11-year-old daughter, Susan. However, during the summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their child credit would be $600 (20% of $3,000).

The credit reduces a taxpayer’s tax bill dollar for dollar. Thus, in the above example, Al and Janice pay $600 less in taxes by virtue of the credit. However, the credit can only offset tax, and any excess is not refundable. The credit cannot be used to reduce self-employment tax or the taxes imposed by the Affordable Care Act.

If you have questions about how the childcare credit applies to your particular tax situation, please give this office a call.

  1. Day Camps – The costs of day camp generally count as expenses toward the child and dependent care credit. A day camp or similar program may qualify even if the camp specializes in a particular activity, such as soccer or computers. The rule that a dependent care center must comply with applicable state and local laws also applies to a day camp where more than six persons are cared for in return for a fee. 

  2. Overnight Camp or Tutoring – No portion of the cost of an overnight camp or a tutoring program is a qualified expense. 

  3. School Expenses – Only school expenses for a child below the level of kindergarten will qualify for the credit. But expenses paid for before- and after-school care of a child in kindergarten or a higher grade are eligible. 

  4. Day Care Facility – The expenses paid to the day care center qualify. If the day care center cares for more than six persons, it must comply with applicable state and local laws. 

  5. In-Home Care – If your childcare provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns. 
To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number. No credit is allowed without that information, except the tax ID number is not needed if the provider is a tax-exempt organization such as a church or school. You may run across care providers who are reluctant to provide their ID numbers because they don’t plan on reporting their income and paying their taxes. Just remember, without the ID number, you cannot claim the credit. Be sure to obtain the required information before you pay the provider.

Some states also allow a similar credit on the state income tax return. If your state is one of those, additional information, such as the care provider’s phone number, may be required.

This credit is also available if you are filing a joint return and need to pay for care for your child while you work and your spouse is a full-time student. You can also claim this credit if you are working and care for a spouse who is physically or mentally incapable of self-care.

For more information about how this credit will affect your particular circumstances, please call this office.

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