Child And Dependent Care Tax Credit

If you pay child or dependent care expenses in order for you to be able to work, you may be able to receive a credit on your taxes. Read this article to find out how.

Being a working parent can be difficult. Not only are you concerned with paying the bills, making sure your children get their homework finished, not to mention the hassles of your job - but you have to figure out what to do with your children after school and on holidays. For many Americans, finding a caregiver is a complicated and increasingly expensive task. Fortunately, the IRS has recognized this, and offers a credit to some working taxpayers who pay for child care services. This is known as the Child and Dependent Care Credit.

In order to qualify for the Child and Dependent Care Credit, a tax filer must meet a number of conditions the IRS has set out. First, you must have a filing status of either, single, head of household, widower with a dependent child, or married filing jointly - if you are married filing separately you cannot claim the credit. Second, you cannot claim the credit if the expenses you paid were to somebody you claim as a dependent, or your own child under age 19. This means if you pay your 15-year old daughter $50 a week to watch her sister (or any other dependent of yours) weekdays after school, you cannot use these expenses toward the credit. Finally, you have to live in the same home as the dependent you are claiming (if you are divorced or separated, you may still be able to claim the credit, though, depending on the custody and child support situation), and you must have some sort of taxable income for the year. If you're married, both you and your spouse must have taxable income, unless one of you was a full-time student or a dependent themselves.

The child or dependent being claimed must meet a number of conditions as well. First, the child must be under the age of 13 when the care was provided - if, for example, your son turned 13 in February of last year, he would still qualify, but only the expenses incurred up until his birthday. If the dependent you are claiming is above the age of 13, they will still qualify if they are mentally or physically unable to take care of themselves. This applies to dependents of any age, and includes your husband or wife if you pay somebody to take care of them.

Qualifying expenses must be made in order for you to be able to work or look for work. Hiring a babysitter so you can go to the movies with your friends does not count as a qualifying expense; hiring one so that you can go to a job interview does. Sending your kids to the sitter while you are home sick does not qualify, because you did not pay the expense to allow you to work or look for work, but under these conditions, payments made to day-care centers, babysitters, home nurses, nannies, or even your niece who watches your kids after school - even if she lives with you (assuming you don't claim her as a dependent) - all qualify as dependent care expenses, so long as they are directly related to allowing you to go to your job or find a job. For specific questions about what expenses qualify, see IRS Publication 503.

There are limits to the amount of expenses you can deduct, as well. These are tied to your income, any work-related reimbursements for child care, and a cap the IRS has set for expenses regardless of income. First, the maximum amount of expenses you can claim per dependent is $3,000. for example, if you are claiming three children as qualifying dependents, you can count expenses up to $9,000. However, this cap is limited by the amount of income you or your spouse (if you're married) earn. You cannot claim more expenses than income earned. For example, if you're married in the above example, but your husband only made $7,500 for the year, you can only claim expenses up to $7,500. Furthermore, your expense limit is reduced by the amount of money you get reimbursed from your employer for child-care expenses. Continuing with the above example, if you received $3,000 in reimbursements from your employer, you must subtract this from your qualifying expenses, reducing your total to $4,500.

To determine the credit, you will have to multiply your qualifying expenses by a fraction that is tied to your total AGI (adjusted gross income). For 2004, the maximum percentage is 35% of your expenses, which you can claim if your AGI was less than $15,000. The percentage decreases as the AGI increases, until you hit the AGI threshold of $43,000 or above, at which point your credit is reduced to 20% of your expenses. Finally, the credit is limited by the total amount of your tax - in other words, you cannot use the credit to get a refund, but you can use it to reduce your tax liability to zero.

If you do qualify, you will have to provide the IRS with information about who provided the care. This is generally nothing more than the name, address, and taxpayer ID (or social security number) of whoever provided the care. You put this information on Form 2441 (for Form 1040) or Schedule (of 1040A), which you are required to file if you are taking the credit. For more information about the Child and Dependent Care Credit speak with a tax professional or contact the IRS.

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