There are several requirements that you must meet to be able to claim a credit for child or dependent care expenses: (1) The expenses must be incurred for the care of a qualified person. (2) You [and your spouse] must share the home that you live in (”principal place of abode”) with the qualifying persons. (3) You must pay dependent care expenses so that you [and your spouse] can work, and you [and your spouse] must have income from work during the year. (4) Your dependent care payments must be to someone other than a person you [or your spouse] claim as a dependent. (5) You must identify the care provider on your income tax return. (6) [If you are married, you must file a joint return.] These requirements are explained in more detail below.
It is also important to note that for tax years beginning in 2009 or later, another requirement applies, which is that in order to claim the child tax credit, the qualifying child must be one for whom you are allowed to claim an exemption deduction on your tax return.
To be eligible for the child and dependent care credit, the expenses must be for the care of: (1) a dependent under age 13 for whom you can claim an exemption; (2) your spouse who is physically or mentally unable to care for himself or herself; or (3) a dependent who is physically or mentally unable to care for himself or herself even if you cannot claim an exemption for the person. A person’s qualifying status is determined each day. [If you are divorced or separated, your child is a qualifying person if you are the custodial parent (you have custody during the year longer than your child’s other parent has custody) and your child is under age 13 or is not capable of self-care, is in the custody of one or both parents for more than half of the year, and receives more than half of his or her support from one or both parents. You generally must claim an exemption for your child unless you waived your right to claim the exemption.]
Additionally, you must work to be eligible for the credit. [Your spouse also must work, be a full-time student or be incapable of self-care.] Volunteer work does not constitute qualified work, but actively looking for work does qualify. The expenses you incur for dependent care must be work-related to qualify for the credit. In other words, the expenses must have been incurred to allow you [and your spouse] to work. The care provided must be for a qualifying person’s well-being and protection. Amounts you pay for food, clothing, schooling and entertainment do not qualify unless these amounts are incident to, and cannot be separated from, the cost of caring for the qualifying person. Expenses for household services may qualify if part of the services are for the care of qualifying persons. The cost of getting a qualifying person to and from your home and the care location is not a work-related expense, unless provided by the dependent care provider. The same is true for transportation costs you pay for the care provider to come to your home. Some expenses may also qualify as medical expenses. These expenses can be used either way, but the same expenses cannot be used to claim both the credit and the medical expense deduction.
Payments made to a care provider who is a relative will not qualify if the relative is a dependent for whom you [or your spouse] can claim an exemption or is your child who is under age 19 at the end of the year, even if he or she is not your dependent.
To claim the credit, you must identify all persons or organizations who provide care on your tax return. [If you are married at the end of the tax year, you must file a joint return to claim the credit. If your spouse died during the year and you do not remarry, you must file a joint return.]
There are two limits on the credit for child care expenses: an earned income limit and a dollar limit. The amount of work-related expenses cannot be more than your earned income for the year [if married at the end of the year, the smaller of your or your spouse’s earned income for the year]. Earned income includes wages, salaries, tips, and net earnings from self-employment but does not include pensions, annuities, social security payments, workers’ compensation, or interest and dividends. [If your spouse is a full-time student or incapable of self-care, he or she is deemed to have earned income of $250 (or $500 if more than one qualifying person) for each month.]
The dollar limit on the amount of your work-related expenses you can use to figure the credit for 2003 and beyond is $3,000 for one qualifying person and $6,000 for two or more qualifying persons. If you have more than one qualifying person in your household, you do not need to divide the $6,000 equally among them. The dollar limit is a yearly limit, which means that you do not need to prorate it based on how long the person was a qualifying person during the year. However, if the dependent was a qualifying person for only the first six months of the year, you can claim expenses only for those six months. The dollar limit is reduced by any child and dependent care benefits received from your employer under an employer-provided dependent care assistance plan.
As an example, assume that in 2008, you and your spouse have two children, ages 4 and 13. Your earned income is $35,000 and your spouse’s earned income is $35,000 and your adjusted gross income is $70,000. The 13-year old child turned 13 on October 1. You paid $5,000 in child care at a nursery school for the 4-year old child and $1,500 (for 9 months, i.e., Jan.-Sept.) for after school and summer care for the 13-year old child, for a total of $6,500 paid in child care expenses for the year. Because you have two qualifying persons, the dollar limit is $6,000. The applicable percentage for AGI of $70,000 is 20%. The amount of credit that can be taken is $1,200 ($6,000 times 20%).
A portion of the child credit may be refundable, meaning that you may be able to collect it even if you have no tax liability to be reduced by the credit. This refundable amount varies and is based on several factors.
I hope this information is beneficial to you. Please call our offices if you have any further questions.