| Tax credits / Child care credit |  |
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For an expense to qualify for the
credit, it must be an 'employment-related' expense, i.e., it must enable
you and your spouse to work, and it must be for the care of your child
(or other dependent) who is either under 13 or handicapped. The cost of
household services can also qualify, e.g., domestic help, as long as the
cost at least in part goes towards the care of the individual. The typical expenses that qualify
are payments to a day-care center, 'nanny' or nursery school.
'Sleep-away' camp doesn't qualify. The cost of first grade or above
doesn't qualify because it's primarily an education expense and not a
'care' expense. Surprisingly, the rules on kindergartens aren't clearly
defined. Apparently, if the school offers a program similar to a nursery
school's (more play ('care') than education) it can qualify. If it
offers more of an educational program, it may not. To claim the credit, you and your
spouse must file a joint return. Further you must provide the name,
address, and Social Security number of the care-giver (or ID number if
it's a day care center or nursery school). A day care center must be in
compliance with state and local regulations. You also must include on the return
the social security number of the children who receive the care. There's
no credit without it. Omission of the social security numbers while
still claiming the credit will result in a summary assessment of tax
liability against you. Several limits apply. First,
qualifying expenses are limited to the income you or your spouse earns
from work, using the figure for whoever of you earns less. Under this
limitation, if one of you has no earned income, you won't be entitled to
any credit. (However, special rules essentially remove this limitation
for a spouse who's a full-time student or disabled.) Next, qualifying expenses for any
year can't exceed $2,400 per year if you have one qualifying child, or
$4,800 per year for two or more. In most cases, this limit will set the
ceiling for you. Note that if your employer has a dependent care
assistance program under which you receive benefits excluded from gross
income, these limits ($2,400 or $4,800) are reduced by the excludable
amounts you receive. Finally, the credit will be computed
as a percentage of your qualifying expenses—in most cases, 20%. (If
your joint adjusted gross income is $28,000 or less, the percentage will
be higher, but never above 30%.) Example:
Lyle and Ellen both work and place their son in a day care center. Lyle
earns $65,000 but Ellen earns only $6,000. They spend $8,500 on day
care. The first limitation discussed above limits the qualifying
expenses to $6,000, Ellen's earned income. The second limits them
further to $2,400. Twenty percent of this amount is $480 and that's
their child care credit. (If the expenses were for two or more children,
their credit would be $960 (20% of the $4,800 limit).) Note that a credit reduces your tax
bill dollar for dollar. That is, in the above example, Lyle and Ellen
pay $480 less in taxes by virtue of the credit. If your employer offers a dependent care flexible spending account (FSA), you may wish to consider participation in the FSA instead of taking the child care credit. (You may not do both). Under a dependent care FSA, you may contribute up to $5,000 on a pre-tax basis. The money is withheld by your employer from your paycheck and placed with a plan administrator in a non-interest bearing account. As you incur dependent care costs you submit a statement with the plan administrator substantiating the cost and receive reimbursement. |
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