 Hello, and welcome to this session in which we will discuss the dependent care credit. First, it's important to understand the purpose of the credit. What is the purpose of the dependent care credit is to offset help with the cost of caring for dependents, such as children, or it doesn't have to be children, elderly parents, or other qualifying dependent, which we'll talk about them later. Simply put, the credit is designed to help working individuals. So if you are working individual, if you are working in families who incur expenses for the care of their dependent while they are at work or actively looking for work. So if you are actively looking, there are special rules for that. But generally speaking, if you are working and you have your kids in a daycare center or you're paying someone to look at your kids, the government will give you a credit to offset that cost so you can have someone looking after your kids at the same time you can go to work. The amount of the credit depends on various factors such as how many dependents do you have, the amount of qualified expenses, and individuals adjusted gross income. There are there are specific rules. We're going to look at these rules in order to determine the dependent care credit. Before we proceed any further, I have a public announcement about my company, fahrhatlectures.com. Fahrhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions, as well as exercises. Go ahead, start your free trial today. Let's take a look at the qualification for the dependent care credit. You must have employment related costs. In other words, you are working the dependent under the age of 13, or a dependent or a spouse. So you could have a spouse, husband or a wife taking care of the other person as long as the other person or the other dependent, it doesn't have to be husband or wife physically or mentally incapacitated and lives with the taxpayer for more than half of the year. So simply put, they cannot take care of themselves. They need someone to take care of them. The credit is worth up to 35% of qualifying expenses, which we'll talk about those later. And that percentage could range from 25 up to 35 based on adjusted gross income. We're going to look at the numbers shortly on the next slide. If you are married, you have to file a joint return. So it doesn't apply. If you, if you are going to married filing separately, you don't have this credit. Eligible care cost. Cost for care. It has to be if it's in home or outside home, it doesn't really matter. If it's outside home, if you're paying someone to take care of that individual outside the home and that person is mentally or physically ill, that's that person is dependent or a spouse, they must spend at least eight hours with you during the day. Otherwise, if they don't spend eight hours, then you're not taking care of them. Child care payment for a relative are eligible. So you can pay your parents, your mother, your father, your brother to take care of your child and have those as eligible payment unless the child is under the age of 19. What are they trying to avoid paying your own kids to look after your own kids? So if it's under the age of 19, that's not qualified expense. Eligible cost for dependent care credit. Well, what is the cost? What is that amount? The cost is the lesser of, notice here, the lesser of actual cost, what you actually incurred, or 3000 for one qualifying individual or 6000 for two or more. So if you're one individual, the number is three. If it's two or more, it's six. There's also earned income limitation. What does that mean? It means the amount of eligible care cost cannot exceed the taxpayer's spouse or the taxpayer's spouse earned income. What does that mean? So let's assume you paid $4,000 for two children. Let's assume that's the case. But we have husband and wife. The husband is making $38,000 per year. The wife is making $2,000 a year. Guess what? What's going to happen is this. So rather than 4000, the only qualified expenses will become 2000. Cannot exceed the lower of the taxpayer earned, this is misspelled, earned income. So you will take the lower of the two and you will go with that. So it cannot exceed that. Why? Because think about it. You are making $2,000 working and you are paying someone to take care of your child for $4,000. It does not make any sense. So the cost is maxed to your earned income. Full-time students or disabled taxpayer are deemed to have earned income. So if you are looking after a full-time, if you are a full-time student or a disabled taxpayer, you are deemed to have earnings of $250 per month for one individual or 500 for two or more individual. So if you're a full-time student, you're not working. Guess what? The government says you are a full-time student. You are earning $250 per month. Assume you have one dependent. So if a mother is going to school full-time and putting her child in a daycare center, well, she doesn't have any earnings. Well, she does. How much is the earning for a full-time student for one dependent 250? If a taxpayer received dependent care assistance from an employer. So let's assume you work for a company and the company is paying you extra money to take care of your child and that money is executed from gross income. It means it's not taxed. It means it's pre-tax. Well, guess what? If you paid $4,000 and your employer gave you $1,000, then you have to deduct the $1,000 from the $4,000. Now your qualified expenses are down to $3,000 or they paid $1,500. You're down to $2,500. Simply put, you cannot have help from the employer that's pre-tax and account for your care as also for the credit. If you're getting the money from your employer as not taxable, you have to reduce that amount against your qualified expenses. And don't worry, we'd look at an example to see all of this. Starting with some simple examples. Samantha is a working mother of a nine-year-old child. Samantha pays her mother Maria $3,200 per year to care for her child after school and also pays her 17-year-old daughter $1,200 to take care of the child during the summertime. Compute the qualified related expenses for Samantha. So simply put, how much of Samantha's payment is qualified expenses? And the answer is the qualified expenses is $3,200. Now remember, we could only have $3,000. The point I'm trying to make, she cannot use her daughter's income or her daughter's expense as qualified cost because her daughter is under the age of 17. So the only amount, it's what she paid to her mother and that's also limited because you could only take $3,000. Homer in March incurred $4,200 in qualified related employment expenses for their dependent son. Homer had an AGI of $45,000 while March was a full-time student for seven months in the year. Well, what's the amount of qualified related expenses? Now remember, they paid $4,200. They have one child, therefore the max is $3,000. Do they qualify for the $3,000? Do they qualify for anything? Because the mother is not. March is a full-time student. And the answer is, yes, they do qualify. How much? They would qualify for seven months times $250, which is $1,750. Although they paid $4,200, the only qualified eligible expense is $1,750. Now we're going to have to multiply this by a percentage to get the credit, but the point is that's the qualified expense. So let's assume, change the scenario and assume March is not working. So March is staying home. Well, how much is the qualified related expense? Zero, nothing, because if March is not working, they don't qualify for this credit. Now let's go back here and assume it's $1,750. That's the amount. Let's not assume that's the amount. So what we do is we go to this table and we would look at the adjusted gross income. And what's the adjusted gross income for Homer and Marsh? $45,000. We're going to go down here. $45,000 is above $43,000. Anything above $43,000, you will get 20%. Therefore, what you do, the amount of the credit is $1,750 times 20%, times 20%. Now the maximum they can get is the maximum that's just going to make sure you understand this. So let's assume Marsh was working and she's also making $25,000. So now we're up to AGI of $65,000. And they happen to pay $4,200. What's the credit? Well, remember for one child, the maximum is $3,000 and they multiply this by 20%. Why 20%? Because anything above $43,000, adjusted gross income, the percentage is 20%. Now I want to point something out that if for the year 2021, those rates and those AGI's were different and the reason because of COVID, but now we're back to these rates. Let's take a look at another example. Tom and Mary spent $8,100 on eligible work-related expenses, qualified expenses for their three children living in their home. Once we talk more than one child, up to $6,000 is qualified, they paid $8,100. So we're going to start with $6,000. Mary received $2,000 and dependent care assistance from her employer, which was correctly emitted from her gross income. It means it was not taxable. The couple combined earning resulted in an AGI of $56,500. Let's assume it was earned $50,50. It means they earned each one of them, earned more than $6,000. What is the amount of the child and dependent care credit that they can claim on their form then 40? Well, remember, first we are limited to $6,000. Although they paid $8,100, they're going to start with $6,000. In addition to the $6,000, the employer paid $2,000. So we're going to start with $6,000, qualified cost deduct $2,000. The employer kind of helped with that. What's left is $4,000. Now with $4,000, their AGI is above $43,000. Remember, any AGI above $43,000, you will get 20%. So if we go back here, they are above this amount. So they will get 20% of the qualified expenses. So 4,000 times 20%, they will get $800 in credit. Compute the credit if the couple's AGI was $32,500 and Mary was the sole earner. So let's assume Tom and Mary, the hero I'd resumed is Tom doesn't work. Mary works and they earned $32,500. Well, be careful. You cannot say $32,500 is here and they will get 26%. They can't. Why? Because Tom is not working. So since Tom is not working, Tom should take care of that child. Therefore, there is no credit for them if we have only one person earning the money and the other person is unemployed. What should you do now? Go to Farhat Luxures, whether you are a CPA candidate, enrolled agent, accounting students, and look at additional resources that's going to help you do what? Understand those credits better, do better on your professional exam, do better on your course. Good luck, study hard, and of course, stay safe.