By JC Leahy
Maximum Legal Refund (TM)
Income Taxes Minimized to Your Best Advantage (TM)
Silver Spring, Maryland
If you would like help preparing your income tax returns, email firstname.lastname@example.org or phone (301)537-5365
Congress can make the simplest thing complicated, and the Child and Dependent Care Expense Tax Credit is no exception. The simple concept is for the Tax Code to help both spouses to be employed outside the home by lightening the burden of child care expenses. This is one of the few personal tax credits that do not phase out because of high income levels. In fact, a couple could have an adjusted gross income of a billion dollars and still claim the Child and Dependent Care Expense Credit.
This is a nonrefundable credit. "Nonrefundable" means that the credit is limited to your income tax liability. Therefore, if you're low-income and your tax liability is consequently zero, then -- sorry -- your Child and Dependent Care Expense Credit is zero, too. Also, if you improved the energy efficiency of your home, for example, with energy efficient windows, and you therefore claimed the Nonbusiness Energy Property Credit (up to $1,500), you will probably be surprised to learn that the Child and Dependent Care Expense Credit will be subtracted from your Nonbusiness Energy Property Credit -- resulting, effectively, in a reduced or eliminated Child and Dependent Care Expense Credit. This is an odd case of qualifying for a tax credit but not actually receiving any money for it. (You have to plan your taxes carefully because the rules are often a bit of a shell game.)
There are some other limits. If you are married filing separate returns, your Child and Dependent Care Credit is limited to zero -- unless the married spouses lived apart for the last 6 months of the year, in which case, one or both may qualify for the full credit as heads-of-household. As heads of households, if they have 4 children (or other qualified dependents) there is the potential to more than double the Child and Dependent Care Credit by simply not living together. Also, expenses associated with the credit are limited to the earned income of the spouse who had the least earned income. The idea is, after all, to encourage the second spouse to put the kids into child care and go out to work, so if there is no second income there is no tax credit. One intersting exception occurs in the case of the couple with children living together without the benefit of marriage. In this case, the fact that one partner does not have any earned income will NOT limit the Child and Dependent Care Credit - because the partner who does have earned income will file as head of household and claim the children (and possibly the partner) as dependents -- thereby being eligible for the full credit. Another exception occurs when one spouse is disabled. The disabled spouse is deemed to have gone out to work even though he or she did not. The disabled spouse is deemed to have had earned income of $250 per month if there is one qualifying child or $500 per month if there were 2 children. Another exception occurs when one spouse is a full-time student for at least 5 months of the year. That student spouse is treated like a disabled spouse. Still another exception may occur when a couple is unmarried, has children, and both are employed. In this case, for all practical purposes, the 2 parents in aggregate may qualify for MORE THAN double the Child and Dependent Credit that they would get if they were married. Why would it be more than double? Because in computing the credit, they would count a maximum 4 children instead of 2, and by separating their incomes into 2 separate tax returns, they probably each qualify for a higher credit percentage.
The credit percentage is a multiplier used to compute the Child and Dependent Care Credit. Up to $3,000 of expenses per child for up to 2 qualifying children are allowed -- at total of $6,000. This total is multiplied by the credit percentage to compute the tax credit. The credit percentage ranges from 35% to 20% depending on Adjusted Gross Income (AGI). The same percentage table is used for married couples and others. Therefore, by being married and combining their incomes, married couples have a lower credit percentage than if they were not married. And if they have 4 children, for purposes of this credit, married couples can only claim half of the children (2) that they could if they were unmarried (2 each = 4).
Children qualify if they are under the age of 13. Once they are over 13, you cannot claim the Child and Dependent Care Credit for their care. Here is an important point, however: In they year that the child turns 13, you can still claim the Child and Dependent Care Expense Credit for the period before his birthday.
Besides dependent children under the age of 13, you can also claim this credit for expenses related to a physically or mentally incapacitated dependent OR SPOUSE who lives with you for at least half of the year. This could include, for example, an elderly parent.
Another wrinkle: Some expenses that qualify for this credit may also qualify as medical expenses on your Schedule A. In this case, you may list some expenses as an itemized (Schedule A) deduction and others as Child and Dependent Care expenses -- but the same expense may not be listed in both places.
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If you would like help preparing your income tax return, e-mail firstname.lastname@example.org -- or phone (301)537-5365.