Archive for the ‘daycare’ Tag
Back to Basics Part XIV – Form 2441 – Child and Dependent Care Expenses
Filed under: Back to Basics | Tags: $3000, $5000, $6000, 13 years, Child and Dependent Care Expenses, childcare, cleaning, clothing, cooking, day camps, daycare, dependent care benefits, Education, Flexible Spending Account, food, Form 2441, Form W-10, FSA, kindergarten, lodging, overnight campts, summer school, tutoring
Leave a comment Originally published in the Cedar Street Times
May 15, 2015
Question: I am the bread winner in our household. My wife is a homemaker and is the primary caregiver for our children, but we still send them to daycare once a week so she can have some uninterrupted time to go shopping, have a quiet lunch, and do some other chores. Can we claim the childcare expenses and get the childcare credit?
Answer: No. One of the requirements for claiming childcare expenses is that it is enabling you to go to work, or actively job search (or you are disabled or a full-time student). If your wife had a part-time job, or a self-employment activity and worked one day a week, then you could claim the childcare for the day you work each week, but you would still not be able to claim the childcare for the non-working day, even though you paid for childcare. This would also be why you cannot claim your Friday night babysitter when you go to dinner and a movie – nobody is working!
This week we are talking about Form 2441 – Child and Dependent Care Expenses. If you would like to catch up on our Back to Basics series on personal tax returns, prior articles are republished on my website at www.tlongcpa.com/blog .
As our Q&A clearly pointed out, the intent of the credit is to allow people to earn more money…which the IRS can then tax. But there are a host of other rules. First of all, who qualifies? If it is for childcare, the child has to be under 13 years old. If the child turns 13 during the year, you can claim expenses up until the day the child turns 13. You can also claim dependent care expenses for a physically or mentally disabled spouse or any other disabled person you can claim as a dependent. You can even claim it for disabled individuals that would be a dependent except their income was too high (there are a few other exceptions as well).
Divorced or legally separated parents can generally only claim the credit if the child lives with them the majority of the nights of the year. Even if you are allowed to claim the child as your dependent per your divorce agreement (such as in alternating year agreements), you still cannot claim the childcare expenses you pay unless the child spends the majority of the nights of the year with you. If your status is Married Filing Separate, you can only claim the credit if you meet the requirements already discussed, plus, you must not have lived with your spouse at any time during the last six months of the year, and you must have paid more than 50 percent of the costs of maintaining your household.
Second, what expenses qualify? Clearly the normal child or dependent care expenses paid to the provider while you work are deductible. You can also deduct the cost of day camps for children during the summer, for instance, but not overnight camps, tutoring, or summer school. You can claim the cost of household expenses such as cleaning and cooking if the individual is also caring for your child and the benefit is partly for your child (such as a nanny that cleans, cooks, and cares for your child). You cannot deduct the cost of education, food, entertainment, lodging, or clothing unless the expenses are incidental to the care provided and not separated out on the care provider’s bill. However, for children younger than kindergarten, you can deduct education expenses as childcare.
Third, how is the credit calculated? The most in childcare expenses that you can claim is $3,000 for one qualifying individual. If you have more than one qualifying individual you can claim up to $6,000. The expenses do not cap out at $3,000 per person either, meaning that if you had only $1,000 of expenses for one child but had $8,000 for the other child, you could still claim $6,000. The credit is then multiplied by a factor of 20 to 35 percent based on your adjusted gross income. If you had over $43,000 in adjusted gross income, which most people do in California, you will be limited to 20 percent. So the 20 percent times $6,000 would be a $1,200 maximum tax credit. Remember that tax credits are much better than tax deductions as they are a dollar for dollar reduction of tax. There are some other limitations as well. For instance, the amount of the credit is limited to the amount of tax you owe (meaning that it is not a refundable credit). Also, the aggregate amount of expenses you can claim are limited to the lower of your earned income or your spouse’s earned income.
Some people get dependent care benefits through their work. For instance an employer may pay the childcare provider directly or actually provide childcare onsite. Or, the employee may make pre-tax contributions from his or her paycheck and put the money into a Flexible Spending Account (FSA) through work to be used for childcare expenses. The amount or value of these items cannot exceed $5,000 each year. Several limitations to this amount are applied on Form 2441. If some of it is disallowed it is added back as an adjustment to wages. There is also the possibility of getting the credit pertaining to the extra $1,000, since $6,000 of expenses are allowable with multiple children, and the dependent care benefits are capped at $5,000.
The Form 2441 itself is a two page document. The first part requires information about the care provider such as name, address, taxpayer identification number and amount paid. Your safest course of action is to provide a Form W-10 to the daycare provider, for the daycare provider to fill out and give back to you. This is a special form just for daycare providers to fill out to provide their correct taxpayer identification information and certification to you. You can then safely rely on that document and not be concerned about the denial of your deduction if you have incorrect information in this regard. Part II of the Form 2441 requires information on the individuals receiving the care and then calculates the tax credit. Part III deals with dependent care benefits and plays into Part II as well.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Home Office Part III – How Big is My Deduction?
Filed under: Home Office | Tags: 39-year, business use of home, cable, carryover, daycare, deduction, depreciation, Form 2106, Form 8829, furniture, home office, improvements, insurance, janitorial, landscaping, maintenance, miscellaneous itemized deductions, mortgage interest, repairs, satellite, Schedule A, Schedule C, square foot, taxes, trash, utilities, water
Leave a comment Originally published in the Cedar Street Times
August 23, 2013
Four weeks ago, I discussed a new simplified option for calculating the home office deduction that is effective for 2013. Two weeks ago I discussed the rules to qualify for a home office deduction. In this final installment on home office deductions, we will discuss the standard method of determining your deduction, which will still yield the greatest benefit for most people – especially in high cost localities. (If you missed the prior two articles, you can find them on my website at www.tlongcpa.com/blog.)
The standard method of calculating your home office deduction is done on a Form 8829 or on tax worksheets. It typically starts with a square footage calculation of the livable space in your home, and a calculation of the portion used exclusively for your business activity, to determine the percentage used by the business. You can use a calculation based on the number of rooms in the house if they are similarly sized, but in practice hardly anybody uses this method.
The next step is to gather your expenses and multiply them by the business percentage you just determined. Add up in separate categories your utilities, water, trash/recycling service, janitorial (house cleaner), repairs and maintenance, homeowner’s or renter’s insurance, and any other recurring expenses used to maintain your house. If you regularly meet with clients at your house, you can generally do the same for your landscape maintenance expenses as well.
If you rent your home, you add up your total rent and multiply it by the business percentage. If you own, you apply the business percentage to your mortgage interest and real estate taxes (the balance go on Schedule A). Some people will throw their internet access fees on the 8829, but often a better deduction is obtained by thinking about actual business use versus personal use, as square footage is not a great metric for internet use. You could then put that directly on your schedule C if you run a business, or Form 2106 if you are an employee with a qualifying home office. If you buy furniture or equipment exclusively for your office, that is generally put on a depreciation schedule and often linked directly to your Schedule C or Form 2106 instead of running it through your business use of home form.
The first telephone line into the house is not deductible at all. A second line could be, however. But in that case it is typically a dedicated business line, and you would put that on your schedule C or Form 2106 in full to get a better deduction. Your cable or satellite service is probably off limits for most people since there is such a high degree of personal use and it is an area subject to abuse. Based on facts and circumstances some people may be able to build a case for part of it – such as a day trader that depends on the financial channels, or if you have a waiting area which clients regularly use to watch television.
If you own the home you need to set up the home and and any improvements on a 39-year depreciation schedule (not 27.5 like a rental home – common mistake) and run depreciation deductions through your business use of home calculation (beyond the scope of this article). Many people fail to do this thinking it is a choice. It is not. There is a use or lose it rule, and you are responsible for depreciation recapture taxes upon the sale of the home whether or not you claimed the deduction. So you might as well take it!
Facts and circumstances and reasonableness will generally rule the day as an overarching principle to the application of all of these rules. Technically, if you only painted your office, you can take 100% of the cost into consideration for your business use of home deduction. On the flip-side, if you painted everything but your office, you shouldn’t really take any deduction. In practice, records are generally not kept that precisely, and the dollar figures are not that large, so you often end up applying the business percentage to everything in that category for the year for practical purposes.
Even after calculating the deduction, there is another hurdle you must pass – you cannot create an overall loss on your Schedule C from business use of home expenses with the exception of real estate taxes, mortgage interest, or casualty losses which would be deductible on Schedule A regardless. If you have a loss, the excess business use of home expenses will get suspended and carried over to a future year when your business is profitable.
Employees have a different hurdle since their home office deduction is an employee business expense which is a miscellaneous itemized deduction subject to a two percent of adjusted gross income floor. So if their total miscellaneous itemized deductions exceed two percent of their adjusted gross income, then the excess is an itemized deduction, and if their itemized deductions exceed the standard deduction, then they can benefit!
Of course there are many other considerations that can come into play depending on your circumstances such as separately metered properties, or separate structures, multiple offices in the same home, or different homes, a daycare home office, etc. This article should be enough to give you the gist, but it is always best to consult with a professional to ensure you are complying with the laws as well as getting all the deductions you deserve.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 