Tax Tip: Expand the Reach of Dependent Care Credit
by AccountingWEB on
By Ken Berry
This is the tenth and final article in our series of tax return tips for 2011 returns.
It's not unusual for both parents of young children to work during the day while someone watches the kids. But at least the parents may be able to claim a dependent care credit - oftentimes called the "child care credit" - to offset part of the cost.
What's more, the dependent care credit may cover more expenses than parents think. It's not just for day care centers and nursery schools.
The credit can even apply to wages paid to a nanny or housekeeper who does other work around the home, but no credit is available for a chauffeur or a gardener.
For starters, the credit can be claimed by a couple or single parent who pays for the care of a child under age thirteen in order to be "gainfully employed." It's equal to 35 percent of the qualified expenses for a taxpayer with an adjusted gross income (AGI) of $15,000 or less. This amount is reduced by 1 percent for each $2,000 that AGI increases, hitting a floor of 20 percent for an AGI of more than $43,000.
This credit is only available for the first $3,000 of qualified expenses for one child; $6,000 for two or more children. As a result, if a client's AGI exceeds $43,000, the maximum credit he or she can claim is either $600 or $1,200, respectively.
The dependent care credit is often associated with out-of-home expenses of busy parents who drop off their kids on their way to work, but in-home costs may qualify, too. For example, the cost of a babysitter who comes to the home is a qualified expense, even if the babysitter is a close relative, such as the taxpayer's parent or in law. But the relative can't be someone that the taxpayer may claim as a tax dependent, such as a teenaged child who the parents pay to watch a younger brother or sister.
The credit may even apply to wages paid to a nanny or housekeeper who does other work around the home. But no credit is available for a chauffeur or a gardener.
Note that the cost of summer day camp qualifies for the credit, but overnight camp doesn't. The day camp can be a specialty camp geared to activities like athletics or a specific academic discipline.
Finally, there's one other important restriction to advise clients about. The qualified child care expenses for a couple can't exceed the annual earnings of the lower-paid spouse. For example, if one spouse works part-time and earned $5,000 in 2011, the maximum credit for a couple with an AGI above $43,000 and two kids is $1,000 (20 percent of $5,000).
|See the whole series of Ken Berry's tax tips for the 2012 filing season|
You may like these other stories...
The tax-filing season got off to a slow start because the IRS said it needed more time to gear up for this year’s returns. But now the pace has picked up considerably.About 40 percent of the returns expected to be...
Tax preparers have completed a lot of returns since the season began and will complete a lot more before April 15 – but that's just the beginning for many accountants and their clients. In the weeks and months that...
To read more articles by Eva Rosenberg, MBA, EA, click here and check out the Talk to TaxMama archive.Once upon a time, tax storefronts and offices in primarily non-English-speaking communities were able to make a very nice...
Upcoming CPE Webinars
BAR is an acronym for: Boundaries, Authority and Role. This simple tool will provide participants with a solid understanding of leadership essentials to improve their performance.
This material is designed to provide a start-to-finish overview of how to plan and complete high-quality small audits efficiently.
In this session Excel expert David H. Ringstrom, CPA shares numerous techniques that you can use to work with charts more efficiently.
Key Accounting and Reporting Issues for Nonprofits No. 1: Overview and Statement of Financial Position
This material focuses on non-profit organizations organization, accounting and reporting.