If you paid someone to care for your child, spouse, or dependent last year, you may be able to claim the Child and Dependent Care Credit on your federal income tax return. The credit is calculated on Form 2441 for filers of Form 1040 and Form 1040A. Here are some points you should know about when claiming a credit for child and dependent care expenses:
The care must have been provided for one or more “qualifying” persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.
Qualifying employment-related expenses are considered in determining the credit only to the extent of earned income (wages, salary, etc). If one spouse is not working, no credit is allowed unless that spouse is physically or mentally incapable of caring for himself or herself or is a full-time student.
The care must have been provided so that you, and your spouse if you are married and filing jointly, could work or look for work.
You and your spouse must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. Generally, a married taxpayer must file a joint return to claim the credit. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.
The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.
The qualifying person must have lived with you for more than half of 2013. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents.
The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.
For 2013, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.
Qualifying expenses include expenses paid for household services and for the care of a qualifying child that allow the taxpayer to work or look for work. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer and may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax.
If your employer offers a child-care Flexible Spending Account (FSA) you may be able to take even more tax savings than utilizing the Child and Dependent Care Credit. Check with your employer.
In summary, if you have to pay child care expenses for your children so you can work you may qualify for a federal income tax credit that can help pay the bills. It is available to all eligible parents regardless of income, although lower income taxpayers get bigger credits. Also, your employer might offer a child care flexible spending account (FSA). When the FSA deal is available, it can offer even more tax savings than the credit.
Mark A. Krohn, a partner, is in charge of the Business Law Team and is also a member of the Trust & Estates Team. He can be reached by phone at 845-778-2121 toll free or 845-778-2121 and by email.