Transcript Slide 1

VITA: 01/17/09
Lesson 23: Credit for Child and
Dependent Care Expenses
Winter 2008
Kristina Shroyer
Lesson 23: Dependent Care Credit
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Introduction
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Looking at Form 1040:
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So now we've got the taxpayer's Taxable Income (line 43) and Tax on line 44.
The next part of this section of the tax return is the Credits.
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This is Chapter 23 in your Publication 4491 and is on page 23-1.
A Credit reduces the tax of a taxpayer
There are two types of Credits
1.
Nonrefundable Credits
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These are credits that reduce the tax of the taxpayer but cannot reduce that tax below
zero.
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The Dependent Care Credit is a nonrefundable credit
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2.
Basically what this means is the taxpayer cannot get a refund as the result of the credit
Dependent Care Credit is another name for "Credit for Child and Dependent Care Expenses"
and is the name I use
Refundable Credits
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These credits can reduce the tax of the taxpayer below zero and cause the taxpayer to
receive a refund
You'll see some of these credits later today
Forms Used to Calculate the Credit
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If the taxpayer files a Form 1040 – Use form 2441
If the taxpayer files a Form 1040A – Use Schedule 2
Let's look at a Form 2441 (Publication 4491-W page 202-203)
Lesson 23: Dependent Care Credit
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General Information – What is the Dependent Care Credit?
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Who can claim the credit?
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The credit may be claimed by someone who in order to work or look for work pays someone to take
care of their:
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Dependent child/children under age 13
Spouses or dependents who are unable to care for themselves
General information on the credit
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It is based on a taxpayer's earned income and AGI
The credit is between 20% and 35% of the taxpayers qualified dependent care expenses
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Note that while this percentage is reduced its never reduced below zero so if the taxpayer has no
dependent care benefits (discussed in a second) their credit is not reduced to zero
It is a non-refundable credit
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So only taxpayer's with taxable income will be able to claim the credit
Taxpayer's who receive dependent care benefits from their employers
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Look at box 10 of the W-2
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Generally the amount in box 10 of the W-2 is not included in box 1
This is where dependent care benefits taxpayers receive from their employers will be reported
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How much of these benefits they exclude from income will affect their dependent care credit
They will have to add any non-excludible benefits to income
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Dependent care benefits may also be called flexible spending accounts or reimbursement accounts
A situation like this could occur when the taxpayer received the dependent care benefits from their employer
but didn't spend them all on qualified child care expenses
Part III of the form 2441 calculates this
Taxpayers may be able to exclude these benefits from their income
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Even if a taxpayer has no taxable income, if the taxpayer has dependent care benefits (box 10 form W-2)
they need to Complete Part III of Form 2441 if they file Form 1040 (or Schedule 2 of Form 1040A)
Lesson 23: Dependent Care Credit
How to Determine if a Taxpayer is eligible for the Dependent Care
Credit
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Five Tests (page 23-2 – Publication 4491)
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The taxpayer must meet all five of these tests to be eligible
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Qualifying Person Test
Earned Income Test
Work-related Expense Test
Joint Return Test
Provider Identification Test
1.
2.
3.
4.
5.
How to determine if the taxpayer meets the five tests?
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Open Tab G of your Volunteer Resource Guide
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We'll go through each test
Page G-2 has a question tree for determining if a taxpayer meets the five tests
Box 7 on the Green Intake/Interview sheet you have should be checked
once you determine the taxpayer has a qualifying person or persons for the
credit and paid eligible expenses
Lesson 23: Dependent Care Credit
Test 1: Qualifying Person Test (page 23-2)
The taxpayer's dependent care expenses must be for one or
more qualifying people
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Look at Tab G in the Volunteer Resource Guide
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Page G-1 has the information for determining if someone is a qualifying person
A qualifying person is any one of the following:
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A person who care was provided for is the taxpayer's dependent AND
under age 13 when the care was provided
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IMPORTANT: Only the custodial parent can take the Dependent Care Credit
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2.
Dependents who were physically or mentally unable to care for
themselves and for whom the taxpayer can claim a dependency
exemption
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3.
This is true even if the child is being claimed by the noncustodial parent
So the noncustodial parent could be claiming the child as a dependent (and taking the
child tax credit as we'll see next) and the custodial parent taking the dependent care
credit
This means the noncustodial parent can NOT take the dependent care credit
OR if the taxpayer could claim the person as a dependent if it weren't for the
$3500 Gross Income test or the Joint Return test (the person had $3500 or
more of gross income or filed a joint return)
This person must have lived with the taxpayer for more than half the year
Spouses who were physically or mentally unable to care for themselves
Lesson 23: Dependent Care Credit
Test 2: The Earned Income Test (page 23-3)
The taxpayer (AND spouse if married) must have earned income
during the year
What is earned income?
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See List on Page 23-3
Also look at Tab H in the Volunteer Resource Guide
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Page H-1, look in particular at what earned income does NOT include
The amount of earned income will determine what percentage is used to calculate the
taxpayer's credit
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What if the taxpayer's spouse is a full time student or unable to care
for themselves?
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In this case the taxpayer's spouse is treated as having earned income for any month the
spouse is mentally and/or physically unable to care for themselves or a full time student
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In this case, the spouse's income is considered to be:
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A full time student is:
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$250 for each month there is a one qualifying person in the home
$500 for each month there are tow or more qualifying people in the home
one enrolled and attending a school for the number of hours or classes the school considers
full time
The spouse must be a full time student for some part of five months during the calendar year
If both spouses are full time students or unable to care for themselves in the same month
only one can be considered to have the earned income described above
Lesson 23: Dependent Care Credit
Test 3: The Work Related Expense Test (page 23-4 through 23-6)
Expenses are considered work related if BOTH of the following are true
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Limit on the amount of work related Expenses that can be used to figure the
credit
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$3,000 for one qualifying person
$6,000 for two or more qualifying people
(We'll see these limits are reduced if the taxpayer received dependent care benefits – box 10 Form
W-2)
Examples of Work Related Expenses (let's look at the list on page 23-5)
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Add day care and nanny expense to bullet 3
Note that pre-school is considered a work related expense
Examples of Expenses that are NOT work related (page 23-5)
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The expenses allow the taxpayer (and spouse if married) to work or look for work (remember a
spouse unable to care for themselves or who is a full time student is considered working)
The expenses are for a qualified person's care, and to provide for that person's well being and
protection
Education expenses for kindergarten or a higher grade
Overnight camp expenses
Transportation from the home to the care location
Read Second Exercise on page 23-5
Lesson 23: Dependent Care Credit
Test 3: The Work Related Expense Test (continued)
Taxes paid for Household Employees
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These are considered a work related expense
Taxpayers should be able to provide a W-2 for the household employee
showing the expenses and payroll tax returns if the employee earned $1600
or more for the tax year
If the household employee did not earn more than $1600 per year the
taxpayer is not required to pay these taxes
Any taxpayer who did not pay taxes on their household employees and are
unsure if they needed to should be referred to a professional tax preparer
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Expenses paid to relatives
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These may qualify as long as they were not paid to someone the taxpayer
claims as a dependent
The taxpayer can NOT deduct expenses paid to relatives in these
situations:
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If the relative was a dependent who the taxpayer CAN claim an exemption for
If the relative is the taxpayer's child who is under age 19 at the end of the year
even if that child is not the taxpayer's dependent
Lesson 23: Dependent Care Credit
Test 4: The Joint Return Test (page 23-6)
General Rule: Married couples who wish to take the
credit must file a joint return
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Exception: Taxpayers can be considered unmarried if they file a
separate return AND:
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They are legally separated on the last day of the tax year OR
They live apart from their spouse for the last six months of the tax year
and paid more than half of the cost of providing a home which was
also the main home of the qualifying person for more than half of the
year
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A taxpayer who's spouse died during the year and has
not remarried generally must file a joint return to claim
the credit
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Question: Can married taxpayers who file as MFS
claim the Dependent Care Credit?
Lesson 23: Dependent Care Credit
How to Determine the Amount of the Credit (page 23-8)
The Form 2441 is Used to Calculate the Amount of the Credit
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The Credit is basically determined by multiplying the work related expenses by a
certain percentage
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The percentage is depends on the taxpayer's AGI
The form has 3 Parts (let's look at it)
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Part I: General Information about the Care Provider
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Part II: Where the calculation is done for the credit
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All taxpayers complete this
This is completed by taxpayers who did not receive dependent care benefits from their
employer (nothing in box 10 of W-2)
Part III: Where information is reported regarding taxpayers who received Dependent
Care Benefits
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Remember this is line 10 of their W-2
We'll talk about this part more next
Taxpayer's who received these complete Part III of the form before Part II (they will have
all three parts completed)
TaxWise will calculate the credit for you and fill out the form
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All you will have to do is input the information on
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the care provider (name, id number address), the qualifying people, the dependent
care benefits, and the work related expenses for each qualifying person.
However you should ALWAYS check the completed worksheet and calculations
Lesson 23: Dependent Care Credit
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Employer Provided Dependent Care Benefits (page 23-9)
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If an amount is in Box 10 of a taxpayer's W-2
These dependent care expenses include:
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Amounts the employer paid directly to the taxpayer or directly to the care provider
Dependent Care Expenses Exclusion from Income
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The employee can exclude some or all the dependent care expenses reported in
box 10 of this from income
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The maximum exclusion is the smallest of:
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The total dependent care benefits the taxpayer received (box 10)
The total qualified expenses incurred during the year
The taxpayer's earned income
The spouse's earned income
$5000 (or $2500 if MFS)
This amount (in Box 10) is generally not included in Box 1 Wages of the W-2
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This means when you reported the W-2 wages on line 7 of the tax return this amount
was not included
If the employee is not allowed to deduct all of their dependent care expenses, the
amounts that are non-excludable will get added to Wages on the Tax return and the
word "DCB" will go on dotted line next to line 7 of the return (for Form 1040)
This is all calculated in Part III of Form 2441
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The good news is you don't have to worry about the calculation if you enter the
information correctly in Tax Wise (more on this next)
Lesson 23: Dependent Care Credit
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Employer Provided Dependent Care Benefits (continued)
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If the taxpayer excludes dependent care expenses from
income they can still take the dependent care credit but
some things change
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If the taxpayer excludes dependent care expenses from
income
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The amount of the excluded benefits
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Can NOT be included in the work related expenses of the taxpayer
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Reduces the dollar limit on the work related expenses that can be used to
figure the exclusion (discussed more in a minute)
The good news is you don't have to worry about the calculation if
you enter the information correctly in Tax Wise (more on this
next)
Lesson 23: Dependent Care Credit
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Limits that Apply to the Dependent Care Credit
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Earned Income Limit
The amount of a taxpayer's expenses are limited by/to an earned income limit.
The amount of work-related expenses used to figure the credit can't be MORE than:
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The taxpayer's earned income for the year or
If Married Filing Jointly, the smaller of the taxpayer's or spouse's earned income for the year
Dollar Limit
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As we already mentioned there is a dollar limit on the amount of work related expenses that can be
used to figure the credit
The dollar limit of work related expenses is $3,000 for one qualifying person and $6,000 for two or
more qualifying people
If the taxpayer received dependent care benefits the amount of benefits excluded from income must
be subtracted from the dollar limit (so the dollar limit is reduced)
See the example on the bottom of page 23-9
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Using TaxWise to compute the Dependent Care Credit
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TaxWise does most of the computation for you
IF the taxpayer has dependent care benefits
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Make sure and Complete Part III of Form 2441 before completing Part II in TaxWise
Common Errors on this Credit
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Make sure all of the required provider information is entered (name, address, identification number)
Make sure Part III of the Form 2441 is filled out if the taxpayer had dependent care benefits (box 10
of the W-2)
Part IV of the Intake/Interview form – make sure box 7 is checked and any special notes are made
regarding the credit for the quality reviewer