MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
CHILD AND DEPENDENT CARE CREDIT EASES BURDEN ON WORKING FAMILIES
(January 21, 2005) — Most working parents would find it impossible to work without paying someone to care for their children. The same holds true for individuals who care for an aged parent or disabled relative who is physically or mentally incapable of self-care. The child and dependent care credit eases the financial burden for working parents and caregivers, reports the Virginia Society of CPAs.
Credit amount tied to adjusted gross income
The credit can range from 20 to 35 percent of qualified work-related child and dependent care expenses. Whether you can claim 20 percent, 35 percent, or somewhere in between depends on your gross income and number of dependents. For 2004, you may count up to $3,000 of the expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals.
Who is a qualifying child or dependent?
For the purpose of the child and dependent care credit, you must maintain as your principal home a household for a child under the age of 13 whom you may claim as your dependent. Persons who cannot dress, clean, or feed themselves, or who need constant attention to prevent them from injuring themselves or others, also qualify. The Working Families Tax Relief Act of 2004 created a common definition of “qualified child” for the dependent care credit, as well as the child credit, dependency exemption, earned income tax credit and other child-related tax breaks. Effective in 2005, general tests involving residency and relationship to the taxpayer will be the same across the Tax Code, but different provisions will continue to use different cut-off ages.
Additional guidelines apply
As you might expect, there are a number of additional requirements you must meet before you can claim the child and dependent care tax credit. First, the care must be necessary so that you can work or look for work. If you’re married, both you and your spouse must be employed or seeking work. The only exception is when one spouse is either a full-time student or is physically or mentally incapable of self-care. You must file Form 1040 or Form 1040A and married taxpayers must file a joint return. To claim the credit, you must provide the name, address and taxpayer identification number of the care provider. The payments for child care cannot be paid to someone you can claim as your dependent on your return, your spouse or to your child who is under age 19. Expenses to attend a day camp qualify; overnight camp expenses do not.
Dependent care credit or employer-provided benefits?
The dependent care dollar limits are reduced by the amount of any dependent care benefits you received from your employer that are excluded from your income. You can find this amount in box 10 of your Form W-2. You must complete Part III of Form 2441 or Schedule 2 (Form 1040A) before you can compute the amount of your credit.
You’ll need to determine which strategy is more beneficial. Your decision depends on the kind of assistance your employer offers, your marginal tax bracket, the number of qualified dependents you have and the amount of your qualified expenses. A CPA can help you determine which strategy is best for you.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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