Let's discuss tax credits related to children - Part 3

It's time to continue our discussion about tax credits related to children.  I hope the previous two
articles were helpful.  In this post we'll cover Child and Dependent Care expenses.

A non-refundable credit or exclusion from income may be taken by a taxpayer for expenses paid for
a dependent under the age of 13 if the expenses are related to work or the search for work.  It is
also possible to do the same for a spouse or dependent that is unable to take care of himself or
herself.  To take advantage of the credit or exclusion the Form 2441 must be used to claim either
of the following.  Exclude from income benefits received for dependent care by an employer plan or
claim a credit for dependent care expenses paid.  The benefits for the purpose of the exclusion are
reported in box 10 of the W-2 and are limited to the smallest amount of the following:

• $5,000 or $2,500 if Married Filing Separately and not considered unmarried.
• Qualified expenses incurred in 2011. It does not matter when the expenses were paid.
• Taxpayer’s earned income.
• Spouse's earned income.

If the benefits received are greater than the excludable amount the excess must be reported as income.

The credit is 20 percent to 35 percent of the smallest of the following:

• $3,000 or $6,000 for 2 or more qualified dependents.
• Qualified Expenses incurred and paid for in 2011.  You may also include amounts incurred in 2011 paid for prior to 2011.  You must reduce the expenses by any amount received and excluded from income.
• Taxpayer's earned income.
• Spouse's earned income.

The percentage listed above is based on Adjusted Gross Income.  If the credit is based on more than one dependent it is OK if the expenses are unevenly distributed between the dependents.

So what are the requirements?  The expenses must be for a qualified person.  The qualifying person must live with the taxpayer for more than half the year.  The expenses must be paid to
allow the taxpayer (and spouse) to work or look for work.  The payments cannot be paid to the taxpayer's spouse, the parent of the taxpayer's qualifying child under age 13, the taxpayer's
dependant or the taxpayer's child under age 19 at the end of the year (payments to other relatives are OK).  The provider's name, address and Taxpayer ID number (SSN or EIN) must be reported. 

I realize that is a lot of information let me elaborate on it.  For the purposes of the credit a qualifying person is:

• The taxpayer’s qualifying child under age 13 who can be claimed as a dependent.
• The taxpayer’s son, daughter, stepchild, foster child, sibling or stepsibling, or a descendent of any of them,
• Lived with the taxpayer for more than half of 2011,
• Did not provide over half of his or her support in 2011,
• Must be younger than the taxpayer claiming the person as a qualifying child,
• Did not file a joint tax return with a spouse unless filed to claim a refund only and no tax liability would have existed for either spouse if separate tax returns were filed, and
• Is claimed as a dependent by his or her parents, if allowed. If not claimed by allowed parents, the child was claimed by another taxpayer, but only if the AGI of the claiming taxpayer is higher than the AGI of any parent of the child.
• A spouse who is disabled and could not care for himself or herself.
• Any person who is disabled and not able to care for himself or herself that the taxpayer claimed as a dependent or could have claimed as a dependent except (1) the person received $3,650 or more of gross income or filed a joint return, or (2) taxpayer (or spouse) could be claimed as a dependent.

A couple more notes.  The qualification is based on a day by day basis.  In other words if a child
reaches the age of 13 during the year the time prior to the birthday qualifies.  The same goes for
the work related requirement, if the taxpayer (or spouse) fails to meet the work requirement for part
of the year the expenses paid during the time that qualifies would be allowed.  A temporary
absence of less than 2 weeks is allowed and does not require an offset based on the day to day
rule.  A spouse that is a full time student or unable to care for himself or herself is to considered to
have earned income for that period.

I hope that you found the post useful.  In the next post in the series we will begin the discussion on
the Child Tax Credit.  I realize there was a lot of detail in the post and if you have any questions or
need any clarification please let me know.