 Income Tax 2021-2022 Software Example, Child and Dependent Care Expenses for Married Filing Joint Filers. Get ready to get refunds to the max. Dive it into Income Tax 2021-2022. Lesser tax software. You don't need tax software to follow along, but you might want to have access to the forms and schedules, which can be found at the IRS website at irs.gov, irs.gov. Our starting point will be, we've got that married filing jointly with the Adam and Eve Smith living in Beverly Hills 90210, along with their son, their dependent Sam Smith, child qualifies for the child tax credit. We've got the 70,000 at the wages noting it's important to be able to allocate between the two spouses for the credit that we're focused on this time. We've got the standard deduction for married filing joint 25,100, getting us the 44.9 for the taxable income. If I was to mirror that on our income tax formula, we're going to say income, what did I say, 70,000. I think it was for the W-2 income, not 7,000, 70,000. 1-0 makes a big difference. 44.9, 44.9, page 2, calculating the tax at the 49.93. 49.93, 49.93. There's our starting point. And so we're focusing this time not on the child tax credit, but for the expenditures for the child and dependent care expenses. So keep those two things separate in your mind. We're going to be looking over here on the 2441 child and dependent care expenses. Adam and Eve, you'll note that the first part basically is who we paid. And just remember the basic premise of this particular credit being that you're paying someone for the child care in order to free you up so that you could go work. So that means that if you're married, then the IRS's perspective then is in general, then both spouses should have some form of earned income as evidence. Unless there's some kind of exception as evidence that they worked because that's the reason that you're paying for the care provider. In other words, if one of the spouses has no earned income, the presumption in general being that they didn't work and therefore you wouldn't need the credit. So keep that in mind because it kind of helps you to visualize what's going on here with the credit. So up top we've got the people that were paying, the institutions might be an institution, might be then an individual. We've got the care provider's name, we've got the address and such. And then we've got the identification number which might be the social security number if an individual or the EIN number if it's an organization. You might request and get this information from AW10, which you can find on the IRS website. That's the dependent care provider's identification and certification where you got the address and the number and so on for that information. If they worked for you, so check here if the care provider is your household employee, we would check that out and then the amount that we pay them. And then down below, we've got the people for whom the care was provided. That will typically be a dependent, in this case our one dependent, that being Sam Smith at being our starting point. So if I do the data input on this, I could say, okay, I've got two sides to it. I've got the person that the care is being provided for that being a dependent which pulls over from the dependent information. Typically I'm going to pay them a large amount which is over the threshold so we can see where the cap is at. And then the second component being who you paid, either an individual or institution, and the two amounts should match, meaning that the sum of who we paid for should match the number of institutions that we paid. In this case, one and one, one person we paid for, one institution. And then if I go back to the forms, that's where the 20,000 is. Notice it's being capped here on line three at 8,000 because I only have one person up top. In other words, if we then say that we're going to read this out, add the amounts in column C of line two. Don't enter more than 8,000 if you had one qualifying person or 16,000 if you had two or more persons. If you completed part three, enter the amount from line 31. We'll talk about that later. The earned income is being pulled from the first page, but notice it's breaking it out between 50 and 8 and 50 and 20 here. That's important because we've got the earned income. And then we've got line five, which says, if married filing jointly, enter your spouse's earned income. So notice on line one, we had the 70,000 on page one, line one. And if I go into the data input forms, that is being made up of two W2s here. One spouse, one for the other. If I was to uncheck this, then it would only be like one spouse. I could do that by accident. So just note that's important with software because you've got to be able to allocate it to each spouse for this credit. Then I no longer get the credit by default because I don't have earned income for one of the spouses. So by default, if there's no earned income, then you would think that that spouse would be able to take care of the child and you wouldn't have the reason for the credit. So I've got to have earned income for the two spouses here. 50, 70 broke out. Broken out, which makes it a little bit more complex than if I was doing the credit calculation for a non-married individual. So there we have it. So now we're at the 50 and the 20. And so then we've got the income threshold here and we've got our thresholds down below for the phase out kind of thresholds. And then we've got the calculation at 50% for the 4,000. That 4,000 is flowing through to page number three. Not on, I'm sorry, schedule three, page number two. And there it is down here in the refundable area. You can also see it's refundable. Notice the schedule is other payments and refundable credits. You could also see that it's a refundable by going to the 1040 page two. It flows in down here and kind of like the refundable area down below online 31 as opposed to up top, which would be like the non-refundable area. Refundable meaning it acts kind of like a payment in that even if your tax liability goes below zero, you'd still get a tax benefit from it. General idea. Okay, let's go back on over to the 2441, the 2441. Notice that we have our income limitations here. So if the income was going below, say the 8,000, let's say we had like a very small amount of income, but still income for both spouses. Let's say it was 2000 and 1000, for example, and then go on over to my forms. So now, even though I had the 20,000 that I put in place, you can see this calculation is going to be a lot smaller because of the income being below that threshold. Let's bring the income back to where it was before, which was the 50,000 and the 20,000. So now we're back to where we were before, and then we've got our thresholds here. If line 7 is 125,000 or less, enter 50.5 on line 8. If line 7 is over 25,000 and no more than 438, you see the instructions. So that's where the phase out starts to happen. So if my income was over that, so let's make this like 150,000, for example. Now I go back on over, I'm at 170, which is over the threshold, and you can see it reflected in the percentage here that is now lowering the amount of the credit. That's going to be the phase out taking place. If it goes way up above the 438, then it's gone entirely. So if I made 500,000, like 500,000, then gone, it's gone. That's why it just disappeared. So let's bring it back down to the original. Let's go back down to 50 and 20, 50, 20. That's where we started at. And let's say now that we had another dependent. So if I go back on over and say we've got another dependent, we've got Jane. We've got Jane. Welcome, Jane. We're looking forward to the tax benefits that you provide us to the family. So anyway, we're going to go back on over to the forms and say now on page one of the form 1040, we've got Sam and Jane. But notice I didn't change anything on the 2441 because I still allocated all the payment that I made to this institution to Sam. And so even though Jane's on there, it's not affecting kind of the cap of the credit. So even if I didn't pay any institution for Jane, if she qualifies, then I can add Jane here and say let's put Jane on like my 2441 form and say add another one and put then Jane in place. Even though I didn't pay anything to the institution for Jane, it was all paid for Adam. So still 20,000 to the institution, but all for Adam. But Jane is qualifying then go back to the forms. Now we've got the same 20,000 going to the institution. We've got it all going to Sam, not Adam, Sam, say Adam's the dad. We didn't pay for Adam's daycare. And then Jane was zero. So now it's up to 16,000 here and the credit now has been increased 8,000 flowing into page three of. So there's the 8,000 flows into page two. That was schedule three page two of the 1040. There is that. So there is that now if you added, if you added another one, it's not going to increase it anymore. So if I said, let's add another one, let's have another dependent. This is great. We need another dependent for our taxes. So I'm going to add another dependent. That's not the reason you should have a we need a dependent tax benefit person. So we're going to go on over here and say we got another one. And so now we've got three here. Let's add that third one to our to our 2441 and say we've got another one. We don't even name them anymore. We just call them a letter T. We go right through the alphabet. T Smith. That's what the name is. So then we're going to go down to the 2441. So now we've got the same 20,000. We've got three of them now, but we still capped it out at that 16. So T Smith didn't even give us the benefit that like Sam and Jane did. What's with that T. Anyway, we like T in any case. So you could of course allocate then differently between these two. You might say that you had Sam was 10,000 that you paid for Sam and possibly Jane 10,000 or maybe 5,000 for Jane and then T. You spent you spent 5,000 for T. So this should add up, meaning if I go to the forum now, we still paid 20,000 to the institution. One institution, three people, 10 for Sam, five for Jane and five for T. And we're still at the 8,000 on that allocation as well. Now you could also have an allocation difference here. Like let's say one of one of the spouse made made only like like like 100 $1,500, let's say that's 15 1500. So now you've got you've got 50,000 and 1,500. So if I go back on over that adds up to the 50 1,500. But notice down here, we've got we've got a smaller amount of the calculation because it's basically multiplying times the 1,500, you know, the smaller amount because it's thought that that's kind of the amount that was freed up. I guess would be the logic or rationale before that. Now you could have a situation where they're a student as well. Let's say, well, like a spouse is a student, for example. So if I was to say, maybe if if I was to say, and I'll just do this fairly quickly, but you might have an exception and say they were they were disabled or a student, for example. And let's say that was the spouse. And let's put it in for 12 for all 12 months, 12 months student. So I'm going to go back on over now. Now you've got the threshold 50,000 for one spouse and the other spouse is now at the 7500. So it kind of did a calculation that I won't go into that detail. You want to, you know, check out the instructions for that. But that could of course have a positive impact on the calculation as well. It could go the other way too. You could say that whichever spouse had was a student or whatever. Maybe this one was at 1500 and this one was at 50,000. And then if I go back on over, so so now the one that was so so now the one that was the student was going to be going to be the other. It's going to be like the other way around. So then if I say, okay, let's go back to my student, my student data input thing jumping to here. And I'm going to go back down and say and say was a student. And this time this one was the student. So they kind of took turns, I guess, or something. So then so then you got that calculation. So you got so you could see how that can kind of work if one of the spouses didn't work. But they were student or disabled. Then you got to look into those instructions and that might give you a benefit for the calculation of the amount of the expenses that could be deductible. Let's go back to the original one. Let's take that away. Let's go back to the original scenario where we had the 50,000 and the 20,000. Let's get back to the normal C here back to the norm. Now you might have a situation where one or other had schedule C type of income. So let's say let's say one of the spouses had a schedule C income. So that would qualify to so we had no W2, but we had schedule C income. And then you'd have to make sure that it's applied to the proper person. In this case, the spouse, we're going to say, and that's going to be the gross income. We'll say that that she made, there's the 20,000. And so I'm going to pull that back on over. So so now we've got we've got the amount being calculated here for the expenses for the 50 and then the 18,587 from the schedule C. So or you might have a situation where you have one schedule C. So you're going to say, OK, what if, for example, I had no W2 wages, but the schedule C was a joint a joint venture joint venture going back on over. You got to be careful with the common property laws and community property and whatnot to do the allocation here. But then we've got the allocation between between the two. And you can kind of see that on the schedule s e because you're going to have to schedule s e's that we talked about before. When we looked at the schedule C stuff because it's a joint schedule C. OK, let's go back to the original. We've got no schedule C. Stop that schedule C. Go back to the wages. We're back at the normal wages with the 50,000 and the 20,000 50 and 20 back to the forms on the 2441. We're at the 50 and the 20 again. Now you could have benefits on a double on the W2. So if that were the case that could have an impact and that would be shown on the second page of the form. So I could go back to one of these W2 s and let's say on line 10 here, we had 2000 of dependent care benefits. That would mean that you already got the benefit because it wasn't included in line one wouldn't be included for federal income taxes. So then that would have an impact. You can't like double dip on the credit is the idea of it. So if I go back on over, then now we have page two, which is in essence, dipping into this calculation. So line 12, enter the total amount of dependent care benefits you received in 2021. It's a W2 line 10. And in essence, you can see the 16,000 we had before is decreased by the 2000. Now at the 14,000 in essence, if I go up to I'm sorry to by go to page one, then you've got the starting point instead of the 16,000. Now basically at the 14,000 is the general idea there. Okay, let's go back to the original again. Let's get rid of that. Let's go back to the original. And let's just lastly, you could have combat pay. This is something that's a little bit more unusual. and let's just lastly you could have combat pay this is something that's a little bit more unusual but you might have combat pay so combat pay if i go back on over and let's say let's say i had another person here or another w2 let's say this is a this is combat pay and this is for the spouse let's say and let's say there's no wages here but we had combat pay which will be shown in box 12 with a q i think a q which is non-taxable combat pay and let's say that that was 10 000 so notice if i if i didn't have the combat pay if i just put like a one here so they made one dollar and then they made combat pay so and i didn't allocate the combat pay what would happen if i go to my forums then the 2441 is severely limited uh due due to the due to the combat pay or actually the combat pay has been included we elected for it to be included so now we're at the 10 000 and one and if we made that combat pay even higher here we're going to say there's there's going to be let's say it was 20 000 of combat pay for the spouse so now you've got the 20 000 and you've kind of maxed out the credits even though the amount on the on the 10 40 is the 50 000 because the combat pay is basically not included so in other words if i went to the 10 40 we've only got the 50 000 it's not including the combat pay but you can elect possibly to have the combat pay be included with the for the calculation of the 2441 you also want to be careful of that with the earned income tax credit so you can kind of do what you want wild card with the combat pay meaning you don't include it in box one so you might not have to pay federal income taxes but you might be able to include it for other things such as calculations of credits such as possibly this credit the child and dependent care credit and possibly uh the earned income tax credit okay let's get rid of the combat pay go back to the normal stuff no combat pay 50 20 again 50 20 so we've got the normal breakout and then let's just note that here on box b for 2021 your credit for child and dependent care expenses is refundable if you or your spouse if married filings jointly had a principal place of abode in the united states so if that were not the case then i could uncheck this and then just check out what that does so we've unchecked that box now so if i scroll down we've got a limitation on the calculation that then pulls into schedule three and notice it's up top on page one this time non-refundable credits as opposed to page two where it was before and then if i go to the 1040 we're going to see on page two that it's up top here in in this area as opposed to uh down below calculation down below here and it's being limited by the amount of income so if i change that back just so we can see the difference between the two and if i say let's change this back and i'm going to go okay now on page two it's not up here but rather it's down here and it's not being limited by the liability so it's beneficial to have it of course on the refundable area and then if i go to schedule c three it's not here it's on schedule two other payments and page two of schedule three other payments so this is going to be the refundable credits and that then if i go to the eight eight one two is being represented by that box being checked off that's what that box does all right