Although tax preparer work is still several months away, summertime childcare expenses are an opportunity to consider future tax consequences. There are several ways that tax rules impact childcare expenditures. Taxpayer awareness results in the record keeping needed at tax time.
The first possible tax matter is the use of a flexible spending account from an employer. This permits a taxpayer to set aside up to $5,000 of untaxed compensation per year for payment of dependent care. Taxpayers who do this are then entitled to apply that tax-free money to the cost for care of a child under age 13 or a disabled dependent. Other conditions also apply that are covered in a tax preparer study course. In most cases, the tax rules for married couples require that both spouses have $5,000 of earned income.
Even taxpayers who do not have flexible spending accounts can still reap a tax credit for childcare expenses. The credit is only beneficial to covering tax liability. Any excess does not add to a tax refund. But the credit can increase a refund of withheld taxes that are not needed to pay taxes covered by the credit.
Most individuals qualifying for this credit find that someone with paid tax preparer training possesses the expertise required to accurately capture the tax advantage. The maximum credit is $3,000 per child and $6,000 total.
The credit is a percentage of childcare costs. The highest percentage is 35 percent and this decreases for taxpayers as income rises. Eventually, the credit is phased out for those in higher income brackets. Again, the credit requires a child be under age 13. Plus, both parents must work. For divorced parents, only the custodial parent can claim this credit.
When an IRS tax preparer determines the tax credit for child and dependent care, there are details required about the expenses incurred. A tax ID number of the childcare provider is required along with name and address. This information is reported on Form 2441.
In most cases, a flexible spending account saves more tax money than the credit for child and dependent care expenses. Of course, any amount set aside in a flexible spending account that is not spent on the childcare as intended gets added to taxable income. In addition, tax preparer study teaches that childcares costs covered by funds in a flexible spending account are not considered when calculating the tax credit.
But childcare expenses that exceed any flexible spending account allocation are then eligible for the tax credit. There are some types of childcare expense that do not count - even if a taxpayer possesses the providers name, address, and tax ID number. One of the exclusions is overnight camp. However, day camps are eligible childcare expenses. This includes soccer camp, computer camp, music camp, and many others that do not involve overnight stays. Also, costs for tutoring and summer school are not eligible childcare expenses for the tax credit.
A taxpayer may report amounts paid for childcare to a relative as long as the relative is not a dependent. However, the relative may live with the taxpayer. Like any other provider, the relative must have a tax ID number and report taxable income received for childcare services. Childcare payments by taxpayers to their own children under age 19 are not eligible for the credit.