A nonrefundable tax credit is available to some taxpayers for the expenses incurred for the care of a child (generally under 13 years of age), disabled child, spouse, or other dependent while the taxpayer is gainfully employed, (or is job seeking). In addition, employer dependent care assistance programs allow employees to exclude from income certain payments expended for child and dependent care.
Generally, the credit is 20% of the cost of the care with a maximum expense limit of $3,000 for one child and $6,000 for two or more. However, for lower-income taxpayers, the credit percentage can be as high as 35%. The expenses that are taken into account for the credit are limited to a taxpayer’s earned income (i.e., income from working).
The limit must be reduced by the amount a taxpayer excludes from gross income under an employer-provided dependent care assistance plan. For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse. Generally, self-employed taxpayers use the net earnings on Schedule C as earned income.
The rules for qualifying for this credit are somewhat complicated and the following are some of more frequently encountered issues:
Qualifying Person Test – Your child and dependent care expenses must be for the care of one or more qualifying persons. A qualifying person is:
- Your qualifying child who is generally your dependent and who was under age 13 when the care was provided, or
- Your spouse who was physically or mentally not able to care for him or herself and lived with you for more than half the year, or
- A person who was physically or mentally not able to care for him or herself, lived with you for more than half the year, and either:
a. Was your dependent, or
b. Would have been your dependent except that:i. he or she received gross income of $4,050 in 2017 (same as 2016) or more,
ii. he or she filed a joint return, or
iii. you, or your spouse if filing jointly, could be claimed as a dependent on someone else’s return.
Work-Related Expense Test – Child and dependent care expenses must be work-related to qualify for the credit. Expenses are considered work-related only if both of the following are true.
- They allow you (and your spouse if you are married) to work or look for work.
- They are for a qualifying person’s care.
- Kindergarten – Generally, the cost of school (including private schools) from kindergarten and up are considered schooling, which does not count as a qualified expense. However, after school care generally qualifies if its cost is stated separately.
- Summer School, Day Camp – Costs of summer school and tutoring programs are not qualifying employment-related expenses because they are educational in nature. A day camp or similar program may constitute a qualifying employment-related expense, even though the camp specializes in a particular activity, such as soccer or computers. The full amount paid for an education day camp that focuses on reading, math, writing, and study skills may be a qualifying expense. No portion of the cost of an overnight camp is an employment-related expense.
- Absent from Work – A taxpayer must allocate the cost of care on a daily basis if expenses are paid during a period in which a taxpayer is not employed or in active search of employment. However, for short temporary absences (generally two consecutive calendar weeks) where the taxpayer is required to pay for the care, the expenses may be counted.
- Medical or Maternity Leave – Cost of care while a taxpayer is on short- or long-term disability leave under the Family Medical Leave Act, paid medical leave, or paid maternity leave are not employment-related expenses.
- Special Rule for Children of Separated or Divorced Parents – In the case of a child of divorced or separated parents, only the custodial parent may claim the credit, even if the non-custodial parent may claim the dependency exemption for that child. A custodial parent is the parent with whom a child shares the same principal place of abode for the greater portion of the calendar year.
- Disabled or a Full-Time Student Spouse – For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse. If the spouse is disabled or a full-time student, he or she generally will not have earned income. In this circumstance, the spouse’s income is imputed for each month he or she is disabled or a full-time student. The imputed amounts are $250 where there is one qualifying person and $500 where there are two. If both spouses were full-time students or disabled (and not working) in any given month, then only one can be considered to have the imputed income for that month. A part of a month is treated as a whole month.
- Care Provided in Taxpayer’s Home – If the care services are provided in the taxpayer’s home, the care provider would be considered the taxpayer’s household employee and the household employee rules may apply.
- Provider’s Tax ID Information – To claim the credit, a taxpayer must include the care provider’s name, address and tax ID number on the return when filing for the credit. It is recommended that IRS Form W-10 is used when obtaining the information. The form includes a place for the provider to sign.
This credit can be complicated and not all the details about the credit are included in the article. If you have questions about whether or not you qualify for the credit, please call this office.