 Hello and welcome to this session. This is Professor Farhad. In this session, we're going to be looking at the child and dependent care credit. This topic is covered in an income tax course, the CPA exam regulation section, as well as the enrolled agent exam. As always, I would like to remind you, my viewers, to connect with me on a personal as well as a professional level. Please connect with me on LinkedIn. If you don't have a LinkedIn account, I strongly suggest you do create one. Facebook account. Please, if you do have one, like my Facebook page and connect with me on a personal level. I like to get to know my viewers on a personal level. My YouTube is the most important part because this is what I house all my lectures. So it's very important that you subscribe. And I would appreciate it if you like the recording, share them, put them in playlist, let others know about them this way. Other people can benefit. This is my Twitter account and on my website, I do have all my courses recorded, all my courses listed by course and organized by chapter. Let's start with the child tax credit. What's the child tax credit? Simply put, if you have a child, you'll get a tax credit. And this is very family friendly tax credit. The credit is $2,000 per child and $500 if you have a non-child dependent. It's a dependent but non-child. Now, what is, what is considered a child? They have to be under the age of 17, U.S. citizen and claim as your dependent. So they are your dependent. Now bear in mind, the child tax credit phase out at AGI that exceeds $400,000 for married, filed in June or $200,000 for other taxpayer. This is great. I mean, this is, this is very family friendly child tax credit. I do take advantage of it. There you go. So you know my income is not about $400,000. I don't mind if it is, I don't want the credit if it was, but it's not. So I do take this child tax credit. Also, is it refundable or non-refundable? Well, this one is both. The child tax credit is partially refundable up to $1,400 per child. So it could be refundable up to $1,400, but no more than 15% of your earned income and access of $2,500. So it cannot be more than 15% of your earned income. That's more than $1,500 if, you know, if it's not $1,400. Okay. Let's take a look at an example. DNE are married, filed in her return and claim dependency exemption for their two children ages five and six, they're below, below the underage of 17. They also claim Elaine 18, I'm sorry, for child tax credit Elaine, Erlene is out from a previous marriage as a dependent. DNE combined, AGI is 68. What's their child tax credit? Simple. They have two kids and each one will get $2,000. $2,000 times two, that's $4,000. That's $4,000. Pretty straightforward. But now, let's take a look at dependent care credit. The dependent care credit is if you happen to be working or if you happen to be taking care of a dependent or a spouse who's physically or mentally in cap is not able to take care of themselves, then the government said you can get a credit for the expenses that you incur. So let's take a look at the details of it. This is the idea. So if you want to put your child in a child care service center, then it's going to cost you money. The government said, that's fine. We'll give you some credit, assuming you are working, assuming you meet certain qualifications. So the first thing you want to know is that this credit is not refundable. So it's not like the child tax credit, partially refundable. General qualification for the credit, you must have employment-related care costs. Employment means you are employed. If you are not working, if one person not working, forget about this credit. Why? Because if you're not working, you're supposed to be taking care of your child. So if you are working, then it's a different story. For a dependent, they must be under the age of 13, or a dependent or spouse who's physically or mentally in capacity, or a dependent or spouse who's physically or mentally cannot take care of themselves and who lives with a taxpayer for more than half of the year. The credit amount is the eligible cost, care cost, times an applicable percentage, we'll see soon. So this percentage, you will see how we come up with this percentage. It's given to you. Okay? Applicable percentage rates range from 25, 20 to 35%, depending on your adjusted gross income. Don't worry, we'll look at the table soon. Married taxpayer must file a joint return to obtain the credit. So if you're married filing separately, that credit is gone. Eligible care costs defined as costs for care of qualified individual with a taxpayer home or outside the home, whether you are paying for child care inside the home or outside the home, that's fine. Okay? If outside the home physically or mentally not capable of themselves, dependent or spouse must spend at least eight hours a day with an a taxpayer home. So if you are paying for something outside the home, that individual will have to be at the home for at least eight hours. Child care payment to a relative are eligible for the credit unless the relative is a child and under the age of 19. So the child cannot be under the age of 19 for the care. So if you paid your son or daughter that's age 18, then I'm sorry, you cannot get the credit. Okay? Amount of cost that qualify is the lesser of. Actual cost or 3,000 for one qualifying individual and 6,000 for more, for two or more. So what's the cost? The cost is if it's more than 3,000, 3,000 for one child, if it's more than 6,000, 6,000 for two or more children. Okay? Earn income limitation. Amount eligible for care costs cannot exceed the lower of, not the higher the lower of. So if you have husband and wife, one is making 30,000 and the other is making 2,500. We're going to have to, the limit is applied to the 2,500. Okay? And you'll see how in a moment. Full-time students or disabled taxpayer or spouse are deemed to have earned income up to the maximum per month limit. So if your spouse is attending college or if your spouse is disabled, then we would assume for every month they are earning $250 or $500. Because remember, you have to have earnings in order to qualify for the credit. So first you have to have earnings, then you have to figure out how much did you incur, then figure out the percentage. But those are the rules. And the best way to illustrate this because you have two or three things running around. Let's take a look at it. Wilma is an employed mother for eight year old son child. She pays her mother, Rita, $1,500 per year to take care of her child after school. Wilma pays her daughter, Eleanor, age 17, $900 for child care during the summer. Of this amount, only the amount paid to her mother is eligible. Okay? Now what we have to do next is find her AGI, find the appropriate percentage, take $1,500 multiplied by the appropriate percentage to find the credit. Don't worry, we'll look at an example. Nancy, and this is the table that I was telling you about, has two children under age of 13, worked full time while her husband, Raji, was attending college for 10 months during the year. So one is working, one is attending college, they're still in good shape. Why? Because Raji is earning, if they have two children, Raji is earning $500 per month. Raji is deemed to be earning $5,000, so they both have earnings. Nancy earned $22,000 and incurred $6,200 of child care expenses. Yes, she didn't incur $6,204 for two children, but I'm sorry, the maximum amount they will count is $6,000. Okay? That's the maximum amount for two or more children. Raji is deemed to have earned $500 per month times 10. I already told you $5,000 because Nancy and Raji report AGI of $22,000. So we're going to go to this table and their AGI is between 21 and 23. So their applicable credit is 31%. Okay? Now, we have to be very careful what's going to happen here. The maximum, although they paid $6,200, okay, they paid $6,200, the maximum eligible credit is not the credit. The amount of the dependent care cost is the maximum you can use is $6,000. However, remember, Raji is not making $6,000. Raji is also only deemed to have earned $5,000. Therefore, you cannot even use the $6,000. You have to use the lower, the $5,000, the lower of the spouse, the income of the lower spouse, which is Raji, multiply this by 31%. And this is how we find out $1,550. Okay? One more time. They paid and cost $6,200. Generally speaking, if you have two children, both parents are working, you will start at $6,000. That's the maximum. Then you multiply it by a percentage. But since Raji is only making $5,000, then you are subject to this amount of eligible care costs cannot exceed the lower of the taxpayer or the spouse earned income because Raji is only making $5,000. If Raji is making $6,000 or more, then they will take $6,000 times 31%. Okay? And that will be their credit. So remember here, they paid $6,200. They can only use $6,000. Then they have another limitation. Raji did not earn $6,000. Therefore, you are limited to the lower number, lower earner figures, which is Raji in this situation. Let's take a look at another example. Paul and Karen are married and both are employed. Paul earned $44,000 and Karen earned $9,000. Paul and Karen have two dependent children, Sam and Joy, both under the age of 13. Paul and Karen pay $3,800, $1,900 for each child to Sunnyside Daycare. And they give us the address. Assume that Paul and Karen file a general return. What, if any, is their tax credit for the child's independent care expense? Well, they paid only $3,800. Therefore, the maximum is $6,000, but they did not pay $6,000. So they paid $3,800. Now, what we have to do is figure out, they make, well, what's their income? Their income is $44,000 plus $9,000. So notice they both made more, each one of them made more than $6,000. So the full amount is eligible. So $44,000 plus $9,000 is $53,000. So let's take, let's go back to the table. Back to the table, they're like 50-something. So they're above $43,000. Therefore, they're eligible to 20%. So what's going to happen? We're going to take, so they are, you know, only 20%. They're going to take 33,800 times 20%. And that's going to be $760. That's their credit. That's the second example. Jim and Mary are married and have two dependent children under the age of 13. Both parents are gainfully employed and earn salaries as follow. Jim 16,000, Mary 5,200 to care for their children while they work. Jim and Mary paid their mother $5,600. Eleanor does not qualify as their dependent, which is good. So this way, whatever they paid her is qualified for the credit. Computer child and dependent care credit. Well, they paid, they paid the mother $5,600. However, Mary only made $5,200. Therefore, when we go to the table, we're going to take $5,200 times the applicable percentage, not $5,600. Now, if Mary made more than $5,600, we will be able to use the $5,600. Okay? So Mary did not make that, did not make more $5,600. Do you remember Raji and the other example? Because Raji only made $5,000, we have to limit our percent, our credit to the lower earner, which is Raji and the other example. So $5,200 times what percentage? Well, Jim made $16,000 and Mary earned $5,200. That's $21,200. $21,200 falls within this range, which is the credit means 31%. Oops. So we're going to take $5,200 times 31%. And that's going to give them $1,612, which is, it's good for Mary that she's working. Although she paid her mother more, $400 more than what she earned. Okay? But the tax credit helped make up for Mary's shortcoming of $400. And remember, Mary, it's good to work because Mary, you're going to gain experience for the future, which you will earn more. So working is good. Okay? If you have any questions, any comments about this recording, please email me. If you're studying for your CPA or if you're college students, study hard. Study hard. It's worth it if you happen to visit my website for additional lectures, please consider donating. Good luck.