Tax Tip: Expand the Reach of Dependent Care Creditby
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.
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|