Federal courts have long held that expenses incurred by taxpayers for the care of dependents, such as a daycare or babysitting expense, while the taxpayer is away from home and at work, are not deductible under I.R.C. § 162(a). However, taxpayers who incur daycare expenses for their children or disabled adult dependents may be eligible for a federal tax credit of up to 35% percent of the cost of day care. To qualify for the child and dependent care credit, you must have a dependent child age 12 or younger, or a dependent of any age who cannot care for himself or herself. You may calculate your tax credit on IRS Form 2441.
In order to claim this tax credit, you must meet each of following criteria:
• Your child or dependent must meet certain qualifications,
• Your daycare provider must meet certain qualifications,
• You must have earned income,
• The care provided must enable you to work or to look for work, and
• You must reduce your eligible daycare expenses by any amounts received under any employer-provided dependent care benefits plan.
I.R.C. § 21 uses the term “qualifying individual” rather than “dependent” to refer to the types of dependents qualifying for the credit. Qualifying individuals must be one of four types:
1) Dependents under age thirteen for whom a dependency exemption may be claimed;
2) Dependents of any age who share the same principal place of abode as the taxpayer and are physically or mentally incapable of taking care for themselves;
3) Spouses of any age who share the same principal place of abode as the taxpayer and are physically or mentally incapable of taking care for themselves; or
4) Certain dependent children of divorced parents.
A taxpayer can claim a dependency exemption for a dependent under the age of thirteen if the dependent is the taxpayer’s child, sibling, half-sibling, step-sibling or a descendant of any such individual. The qualifying child must not provide more than one-half of his or her own support and must have the same principal place of abode as the taxpayer for more than six months of the year.
Normally, the child must also be your dependent. However, if the child is not your dependent solely because you allow the non-custodial parent to claim the child as a dependent, then you may be able to claim the child care credit. However, only the custodial parent can take the child care credit.
The taxpayer must “maintain the household” for the qualifying individual(s), meaning the taxpayer must provide over one-half of the total cost of maintaining the household. Also, if the taxpayer is married, both the taxpayer and their spouse must have income they earn, unless one spouse was either a full-time student or was physically or mentally incapable of self-care.
The person who provides childcare or adult daycare services cannot be a dependent. You cannot pay your daughter to take care of her younger sibling unless the daycare provider offspring is not a dependent of the taxpayer and age 19 or older by the end of the year.
The child and dependent care tax credit is worth 20% to 35% of day care expenses. The percentage of the credit depends on a taxpayer’s adjusted gross income.
Qualifying expenses include ancillary “household” services in addition to those incurred for actual physical care of the dependent. Services outside the home qualify if they involve the care of a qualified child or a disabled spouse or dependent who regularly spends at least eight hours a day in the taxpayer’s home. Payments to a relative also qualify for the credit unless the taxpayer claims a dependency exemption for the relative or if the relative is the taxpayer’s child and is under age nineteen as mentioned above. The IRS allows no credit for expenses incurred to send a dependent to an overnight camp.
If you have questions about the Child and Dependent Care Credit, Call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
