This week we will discuss 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 most that is allowed is $3,000 worth of care expenses for one dependent, and $6,000 worth of care expenses for multiple dependents.
The amount of the credit can be as low as 20 percent (%) of the maximum allowed amount, or as high as 35 percent (%). For 2015 the minimum allowed credit with one child was $600, and the maximum allowed was $1,050. With multiple dependents, the minimum allowed credit was $1,200 and the maximum allowed was $2,100.
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:
- You may qualify for the credit if you paid someone to care for your child, dependent or spouse last year.
- The care you paid for must have been necessary so you could work or look for work. This also applies to your spouse if you are married and filing jointly.
- The care must have been for ‘qualifying persons.’ A qualifying person can be your child under age 13. They may also be a spouse or dependent who is physically or mentally incapable of self-care. They must also have lived with you for more than half the year.
- You, and your spouse if you file jointly, must have earned income, such as wages from a job. Special rules apply to a spouse who is a student or disabled.
- The payments for care can’t go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Care payments also can’t go to your child under the age of 19, even if the child isn’t your dependent.
- The credit is worth up to 35 percent (%) of the qualifying costs for care, depending on your income. The limit is $3,000 of your total cost for the care of one qualifying person. If you pay for the care of two or more qualifying persons, you can claim up to $6,000 of your costs.
- Overnight camp or summer school tutoring costs do not qualify. You can’t include the cost of care provided by your spouse or your child who is under age 19 at the end of the year. You also cannot count the cost of care given by a person you can claim as your dependent. Special rules apply if you get dependent care benefits from your employer. For more see Form 2441, Child and Dependent Care Expenses.
- You must include the Social Security number of each qualifying person to claim the credit. You must report this information when you claim the credit on your tax return.
- You must include the name, address and identifying number of your care provider to claim the credit. This is usually the Social Security number of an individual or the Employer Identification Number of a business.
- Remember that this credit is not just a summer tax benefit. You may be able to claim it for care you pay for throughout the year. To claim the credit, attach Form 2441 to your tax return. 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 is $3,000, for multiple dependents it is $6,000.
- 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 your tax preparer for specifics)
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