Holding those little ones in your arms and slowly guiding them through the path of life, is surely one of the most joyous and fulfilling experience of a lifetime. But there is no denying that it can be hard on your pocketbook. Catherine, a mother of two children aged 7 and 10, experiences this dichotomy between pleasure of child rearing and its pinching effect on the pocketbook. So, to alleviate the effect, you must utilize the option of child and dependent care tax credits to the best of your abilities.
This week we will discuss about child and dependent care tax credits and filing Form 2441. If you have a child under the age of 13, or an incapacitated spouse or parent, you may be able to take a dependent care credit on your individual tax return.
The amount of the credit can be as low as 20 percent (%) of the maximum allowed amount, or as high as 35 percent (%). For 2019 the minimum allowed credit with one child was $600, and the maximum allowed was $1050. With multiple dependents, the minimum allowed credit was $1,200 and the maximum allowed was $2,100. Each year the amount of the credit may change. Your tax professional will know that limit.
To claim this credit, you will need the name, address, and taxpayer identification number of the dependent care provider. The money paid to the provider is income to them that must be reported. You will also need receipts for the payments made to the dependent care provider, to give to your tax preparer. There are certain rules that must be considered to find out if your income level is too high to take this credit, and your tax preparer will be able to help you figure this out.
Some employers offer pre-tax dependent care benefits. If you have dependents that fall into these categories, usually it will be advantageous to use your employer’s pre-tax dependent care plan. It will save you taxes to use an employer’s plan, but it will also limit the dependent care credit you are eligible for. Your accountant can help with this decision.
Here are 10 facts from the IRS about this important tax credit:
Be sure to consider the following, when preparing the Form 2441 for Dependent Care Tax Credits. Here are some points to remember:
• The maximum amount of expenses allowed for one dependent and multiple dependents is limited each year. Ask Azmoneyguy or your tax professional for the amounts.
• You need the name, address, and taxpayer identification number of the dependent care provider to complete the Form 2441.
• If your employer offers dependent care reimbursement, that will reduce the amount that is available to you, dollar-for-dollar.
• This credit helps reduce regular income tax but may not reduce alternative minimum tax (be sure to see Azmoneyguy or your tax professional for specifics).
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