Line 48 Credit for Child and Dependent Care Expenses

Single parents and two-career couples must find ways to care for their young children or a dependent while they work. If you are under this situation, you may be able to reduce your tax by claiming the Credit for Child and Dependent Care Expenses.

Requirements:
1. Married taxpayers generally must file a joint return.
2. The care must have been provided so the taxpayer could work or look for work.
3. The taxpayer must have some earned income.
4. The taxpayer and the person(s) for whom care was provided must have lived in the same home.
5. The payments for care cannot be paid to someone you can claim as your dependent or to your child who is under age 19.

Qualified Persons:
1. A dependent who is a qualifying child and has not reached his 13th birthday.
2. A dependent of any age who is physically or mentally incapable of self-care and lives in same place.
3. A spouse who is physically or mentally incapable of self-care and live in same place.

Qualified Expenses:
Included:
* Cost of services for the qualified person’s well-being and protection while the taxpayer works or looks for work
* In-home care of qualified person
- May also include amounts paid for cooking and light housework related to the care but not chauffeur or gardening services
- Household Employee Expense
Wages
Cost of meals and lodging furnished to the employee
Employer’s social security, Medicare, FUTA
Other Payroll Taxes paid on the wage

Taxpayer who pays wages of $1,400 or more during 2005 to household employee must pay employer’s share of social security and Medicare taxes.

Not included:
* Cost of clothing or entertainment
* Cost of transportation to and from the child care facility
* Overnight camp expenses
* Any expense allocable to the education of a child in the first grade or higher
(Exception) Total cost of schooling below the first grade qualifies only if cost of schooling and care can’t be separated.

Computing the Credit:
We need 2 steps to decide the credit amount.
1. To decide base amount. Base amount is the smallest of:
* Qualified expenses incurred and paid during 2005
* $3,000 for one qualifying individual or $6,000 for two or more qualifying individual
* The lesser of taxpayer’s or the spouse’s earned income
Be careful!!! For purposes of this credit, earned income also includes nontaxable earned income, such as
* Voluntary salary deferrals, such as those made to § 401(k) plans
* Meals and lodging provided for employer’s convenience
2. Base amount x % = Credit amount
% is based on your adjusted gross income.
The credit can range from 20% to 25% of your qualifying expenses, depending
upon your income.

Credit Limitation:
Credit for Child and Dependent Care Expenses is nonrefundable credit. The limit is up to his tax liability. Any excess is lost.

Employer-Provided Benefits:
If employer provides dependent care benefits that are shown in Box 10 of Taxpayer’s Form W-2, the benefits usually reduce the qualified expenses eligible for the credit.

Employer-Provided Benefits are usually non-taxable benefits. However, part of the employer-Provided benefits may be taxable if the benefits exceed the smallest of
* Qualified expenses
* The lesser of the taxpayer’s or the spouse’s earned income
* $5,000 ($2,500 MFS)
Any taxable amount should be added to the taxpayer’s wages entered on line 7, Form1040 or 1040A, the letters “DCB” written to the left of line 7. “DCB” means Dependent Care Benefits.