Can You Take the Child and Dependent Care Credit?
The Tax Cuts and Jobs Act that was recently passed, did not alter the Child and Dependent Care Credit, but I thought this was an important topic to cover. Many of the beauty industry experts that I meet, are also parents, which means a good majority of them are paying for child care. Here are a few items to make sure you are eligible to take the credit.
Let’s start with figuring out who qualifies as a dependent for this credit.
- Any child under the age of 13 that qualifies as your dependent.
- Your spouse or other dependent that is incapable of self-care and has lived with you in the home for over half of the year.
Did you know that even if the non-custodial parent can claim the child for that tax year, the custodial parent can still take the Child and Dependent Care Credit? Oftentimes, it is assumed that whomever takes the personal deduction for the child, is the only one that can take this credit.
Janet is married with 2 children and is working in a salon as an employee. Her son, from her previous marriage, is 10 and her daughter, from her current marriage is 3. She has custody of her son and is the primary caretaker, but this year is the father’s turn to get to claim the personal deduction for the child. When Janet files her taxes for 2017, she would claim the standard deduction for married filing joint. The number of personal deductions will be 3, because the 10 year old son will be claimed by his father. Since both Janet and her husband are working, they can claim Child and Dependent Care credits for both the 10 year old son and the 3 year old daughter.
The next factor for determining if you can take this credit is based on who is providing the care.
- It cannot be your spouse, or the parent of the child. This would be a case of the step-parent being the caregiver, or the non-custodial parent. This is not allowed.
- It cannot be another dependent that is under the age of 19.
- It cannot be any other dependent that you claim on your taxes.
Joe is a barber and has custody of 2 children from a previous marriage. His former spouse, Rachel, stays home to take care of the children allowing her additional time with the children as well as a small amount of income. When Joe files his taxes, he cannot claim the amount of money he paid Rachel for child care, because she is the non-custodial parent.
When you choose the provider, and ensure they do not meet the conditions above, you need to gather some pertinent information. You will need to get their name, address, and their taxpayer identification number or their social security number. You can download IRS Form W-10 and ask the provider to complete it and then use can use this as an official document for your taxes. You many still be able to get the credit, if you don’t have any of this information. In that case, you will need to be able to prove that you made every attempt to get the information, but the provider would not give it to you. My word of advice on this is to get the information prior to your child receiving care.
You, or you and your spouse, must both have earned income to qualify. A spouse that is in school full-time or incapable of caring for themselves, is considered as having income. Expenses that can be used for this credit are so that you can work or look for work. Specific expenses that are allowed include day care or preschool setting for children under the age of 5, and before and after school care for children in Kindergarten or above. Eligible expenses are capped at $3,000 for one qualifying dependent and $6,000 for two or more qualifying dependents. In the end you are only going to get between 20%-35% of this amount as a credit on your taxes.
There are some expenses that might seem like care, but don’t factor them into your expenses for this credit. Some of these expenses that are not allowed to be claimed are those expenses are for your child to attend Kindergarten or a higher level of education, summer school or tutoring.
There are additional ways that taxpayers can get assistance in this area. Some employers provide childcare and the first $5,000 is not considered taxable income, however, anything above that $5,000 will need to be claimed as income on your federal tax return.
There are also employers that have set up Section 125 plans. These are Flexible Spending Accounts (FSA), that allow you to deposit pre-tax dollars to use for childcare or medical expenses. As a salon owner, you may want to check into this for your employees!
One last note concerning the employer provided benefits. These cannot be included in the expenses that you are claiming for the Child and Dependent Care Credit. For example, if you have a total of $5,500 in childcare expenses for two or more children, and you have a FSA that you contributed $5,000 to, then only the remaining $500 can be used toward the Child and Dependent Care Credit.
James and Destiny are married. James is working to support the family while Destiny is attending cosmetology school full time. They have 3 children and their child care expenses are $13,200 annually. They have put $5,000 into a flexible spending account that they use for child care. When they file their taxes, they must reduce the $13,200 by the $5,000 that was used for child care, leaving a balance of $8,200. Of this balance they can claim $6,000 for the Child and Dependent Care credit because they have more than 3 children, the childcare provider is unrelated to them and are both considered to have income, even though Destiny is in school.
If you need assistance with specific tax questions, contact us at firstname.lastname@example.org or 407-988-5647.
Categories: Tax Information