Travis H. Long, CPA, Inc. Blog

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.