Aug 16th 2011
By Ken Berry
As a new school year beckons, parents may be enrolling their young children in kindergarten and various other after-school programs. Can taxpayers claim the dependent care credit for any part of those expenses? In final regulations, the IRS recently spelled out definitive guidelines for determining eligibility for the credit.
To qualify for the credit, a taxpayer must incur expenses to care for a child under age thirteen and be gainfully employed. A married couple is treated as being gainfully employed if one spouse works full-time and the other works either full-time or part-time or is a full‑time student. Generally, a married couple must file a joint return to claim the credit.
The applicable credit percentage is 35 percent of the eligible expenses for a taxpayer with an adjusted gross income (AGI) of $15,000 or less. The percentage is reduced by 1 percent for each $2,000 that the taxpayer's AGI increases; however, the credit percentage cannot be reduced below 20 percent for an AGI of more than $43,000.
The credit is available for the first $3,000 of qualifying expenses for one child and $6,000 for two or more children. Thus, for clients with AGIs exceeding $43,000, the maximum credit is $600 for one child and $1,200 for two or more children. Qualifying expenses include costs for traditional babysitters, day care centers, and nursery schools. The IRS also has established that the cost of summer day camp may qualify for the credit, but overnight camp doesn't.
In the past, some tax commentators have suggested that parents who pay tuition to send their children to full-day kindergarten should be allowed to apportion some expenses to the care of the children. However, final regulations issued in 2007 refute this approach (T.D. 9354). Because kindergarten programs are primarily educational in nature, the IRS says that parents aren't entitled to a credit for any portion of the cost.
The same principle applies to half-day kindergarten. Silver lining: If parents pay other child care expenses before or after a half-day kindergarten session, those expenses may be eligible for the credit.
Clients should consider the tax implications when arranging care of children under age thirteen during the school year. The credit may help defray some of the costs.