 Income tax 2022-2023, child and dependent care expenses, tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 populated with LASERT tax software. You don't need tax software to follow along but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website, irs.gov, irs.gov, starting point single filer Mr. Anderson living in 90210 Beverly Hills. We got the W-2 income at 100,000, 12,950 standard deduction, 87,050 for the taxable income page. Number 2, 14774 for the tax calculation, 15,000 withheld, bottom line 226. Now we'll go back on over to page 1. Our focus is on child and dependent care expenses. So let's first add a dependent which will typically move someone up if they were a single filer to the head of household filer. We'll have the child tax credit which is different than what we're talking about here. Child and dependent care expenses and then we'll jump into those items. Okay, so here we have it. Now we have added Joe Anderson as a son. Qualifies for the child tax credit we're going to be saying which is not our focus here. It's similar name. We're focused on the child and dependent care expenses. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. We'll see how the normal things kind of integrate together when you've got a child. And so we're going to then say okay page one actually it should be head of household now. Okay, I fixed it. I fixed it. So it's head of household now. So now everything else is the same, but the standard deductions at nineteen four hundred get us gets us to the eighty thousand six hundred page number two. Then we have the tax at eleven eight fifty five and then we've got the child tax credit. That's the one thing that has changed now. So now we attack on to that. The other benefit of possibly having the child is that you can have expenses related to the care of the child. So normally when we think about this from a just a practical data input standpoint most software you'll think about two kind of sides to this. We're going to have one the child that or that you're claiming the expenses for and then we're going to have the institution that we're going to have to be claiming the expenses. Whoever did the child care that we're going to need the number for. So let's first I only have one dependent here so it's pretty easy. We're going to say that was for Joe Anderson here and then the qualified dependent care expenses. Let's put something over the threshold. It's going to cap it at three thousand. I'm going to go over the threshold for now so we can see that cap and go up to five thousand. And then the other side of things we need to do is the institution. So I'm going to I just made up an institution here. So so what we need is the name of the institution the address of the institution and you need the institutions in number. If it is an institution if it's an individual then they might have the social security numbers. That's the typical information you're going to need. Notice here that I'm populating as well the total amount paid to care provider in two thousand and twenty two. So because there's only one dependent it's pretty straightforward. It can get a little bit confusing when you have multiple dependence that are possibly are being taken care of by the same provider. So you can imagine for example having two kids and maybe we'll test that out shortly with the same care provider. And so you paid five thousand each for each individual kid or something like that. But let's start here for now. So I'm going to go back on over and say OK. Obviously we're going to we're going to imagine that the care was provided to help to generate the allow Mr. Anderson here to work. And because Mr. Anderson is single you would think that the care provider would be more easy to fit that qualification. Although it does get a little bit confusing when you're talking about say what's the primary goal that you're sending the child for the care for. Is it for the care or for some other purpose like educational purpose or something like that. But we're going to we're just going to practice the data input now. So then on page number two page one is much the same page number two. Now you got this other six hundred dollars that's been pulled in from schedule three line eight. So if I go to schedule three line eight here it is. This is the credit for child independent care expenses from form two to I mean two four four one. So we could go to form two four four one. This is the child independent care expenses. So we've got the name up top social security number. And then here's the care provider's name. This is the person or organization to provide the care the address the number. That's what the IRS typically wants was the care provider your household employee in two thousand twenty two. In this case we're saying no the amount paid five thousand dollars we're saying. And obviously you want to have the support for that in the event that you had an audit or something. You'd want to be able to support that that number. And then down here you can see it's basically going to be capped at three thousand where it says add the amount on column D to line two. Don't enter more than three thousand if you had one qualified person or six thousand if you had two or more person. So it's going to be capped at three thousand for one six thousand for two or more. Earned income is the one hundred thousand that's pulling in from the form ten forty. And then basically you can you can see they're taking the table down here so it capped out of three thousand. And then they're taking the table which is going to take some fraction of the allowable credit. Not five thousand what we paid but the cap in this case of the three thousand is looking at this table to see that we're at the one hundred thousand. So you can see obviously as the income goes up it's going to be having a smaller number that's going to be used. And it's picking up the forty three thousand and over the twenty so three thousand times the twenty percent is the six hundred. And then we could have a limitation for the tax liability because I don't believe this is a this is a non refundable not a refundable credit. And that's what's pulling into the line three which is pulling in to the first page of I'm sorry the second page of the form ten forty. Now obviously now the other thing to note here is that you do need to have income for the calculation. So let's imagine you didn't have any earned income and you had some other source of income like interest or something maybe. So let's say earned income is is gone. Well then we're going to say then you might have had like interest income like dividends or something. And then interest income was ten thousand let's say ten thousand interest income and that's it. And then so you could see now it's not calculating because we didn't have any income. And the point of the credit is that you had income and and and you're paying the expenses in order to generate income you don't have any income and passive income doesn't really count right even if I made the passive income one hundred thousand. Then generally still you may have the child tax credit pops up here but we don't see that six hundred dollars for the other credit because that's all passive income. It's not active income. It's not in this first section of the income but down here in the passive area. Now let's imagine that you had a decent amount of income twenty thousand but still with the standard deduction at the nineteen thousand four hundred taxable income would only be at six hundred dollars. So that would mean the tax is quite low at sixty one dollars. And then you could see what what we still have the calculation here but it's being limited to the sixty one dollars right here sixty one dollars from schedule three. And then if I go to two four four one just to look at that calculation we paid the five thousand. We have the three thousand dollar limit. And now you have a different rate that's being used because we didn't have as high of an income. So it would have been at the nine sixty but it capped it at the sixty one because it's non refundable right. It's not taking the liability below zero. It's taking it's taking the tax being paid down to zero. Now it's kind of interesting the interplay between a credit like this credit and the child tax credit which is which has similar characteristics to it because the child is going to be involved with it. And the child tax credit does have a refundable component to it. So notice it basically allows you the the credit for child independent care and then the child tax credit you have the additional child tax credit which is the refundable portion of the child tax credit. So some of these get a little bit messy when you think about the interplay between the different credits especially when you get into like refundable and non refundable portions of the credits. All right let's add another person. So now we've got another dependent and then I'm going to jump on over here and say now we've got two dependents. I'm going to add another one. Let's say we're paying for both of them and let's say we're paying them to the same institution five thousand each. So I'm going to say qualified dependent care five thousand each will say but it's going to the same institution. So I'm going to have the same institution having ten thousand. So now I've got two people right. So you might have them go into two different institutions or you could have them going to the same institution which might look something like this. So if we jump back to the form 1040 then we're going to say all right Anderson two dependents now 20. Let's bring the income back up to 100,000 100,000 on the income so we don't hit any limit there. And so I'm going to go boom and then 100,000 page number two. So we have the four thousand for the child tax credits and now we're up to the one thousand two hundred which is pulling ultimately from the two four four one. So now we've got the institution amount of the ten thousand to two people two children five and five. We got limited to the not the three thousand for one but six thousand but it's going to cap at six thousand even if we go above that even though we paid ten thousand. And then it's going to be picking up that 20% based on the qualified amount which is the six thousand and that's where we get the one thousand two hundred. We don't have any we still have tax so we're not going to hit a limit because of the non refundable. That's what's pulling over. Now if I add one more let's do one more here because why not at this point. So we'll add another one not there. Hold on a second. I'm going to add another one here. So we'll say another and this is going to be Eric Eric and we'll say on the second one we'll say we paid for Eric another five thousand to the same institution. So we're going to Sarah qualified five thousand same institution. And so now this is at fifteen thousand. Now you would think if they kept it three three and three we would get three six nine but no it's still going to cap it at that one thousand two hundred. So if I go to page one we're at three kids. We paid all three of them. We still got the child tax credit which is at six thousand. But we're still at the one thousand two hundred here for the child and dependent care expenses. So if I go down to the two four four one then you can see that we're still here because it capped it at the six thousand for two or more children. All right. So we have a similar situation if married. So let's go to the married situation but we would have to have both spouses working would be the general idea in order to take the credit. So for example here I just switched it up to married. But I didn't I didn't assign the W two wages to the spouse Jane here. So now we still have the three dependents a hundred thousand. Now the standard deductions at twenty five nine getting us to the seventy four one page number two. We still get the six thousand child tax credit. But we don't have anything being calculated for the other credit because I didn't assign any income to the other spouse. So this is where it becomes important in tax software to assign the income. So let's imagine they both earned fifty thousand with two separate W two forms W two. If I don't if I don't check off notice that if I do this fifty thousand and fifty thousand. And let's say that these were two W twos for first two different spouses. That's legitimate. But I didn't properly mark off which W two is for which oftentimes it doesn't matter because they're one entity for taxes right. They're one financial entity. So it's still a hundred thousand. Everything looks correct. But the problem is here this particular credit is going to be based on whether or not each individual spouse had earned income. So I have to make sure that I go and say I'm checking this one off for the spouse so that I can assign that to the spouse so that they can have their their earned income so that with the credit will then populate within the software. So now if I go back to the two four four one we've got the same kind of scenario. But the idea being that that both spouses have to be working because if it was a one spouse working household a traditional household you would think that the other spouse could take care of the kids and you wouldn't need the expenses in order to work. Whereas a single family household you would think that they that would be the case. Again it's kind of funny the way these these laws populate. You can you can see that makes sense to one degree because you're like that. But it also kind of disincentivizes marriage again because because the anyways. So now the other thing to be aware of is you might get say a benefit. If you're if you're working for an employer and you get a benefit say on a W2 that the employer is paying for dependent care. And remember when you have an employee employer kind of situation oftentimes what the employer can have their money go a little bit further if they can give money that would be have a tax benefit to the employee like a 401k plan. The 401k plan then has the income not included in box one. So the employer is able to pay the employee without having that significant tax benefit or at least by deferring it. So if you could do that with other things like like dependent care or something like that have the employer be able to pay and not include it in income that would be great. But it gets a little bit confusing then if you have a credit that could be possible and then you've got this dependent care benefit. So let's imagine for example box 10 of the W2 has has dependent care benefit of 6000. So then if I go back on over notice it's limiting the credit here to the 1000. So we still said that we paid the 15000. But and then the 5000 each but says here add the amounts of line D to enter 3000 if you had one or qualifying person 6000. If you have two or more if you complete part three. So it's going to be the 1000. So if we go to part three then dependent care benefits we have the 5000 that won't go through the whole thing. But the general idea is that we have to limit it to the 1000. And by the way the reason it got limited to the 1000 instead of the 6000 wiping it out entirely is because generally if I if I go back on over here. Usually this number will be kind of capped at 5000 because you can get the dependent care benefits that go over the 5000. But then that amount over the 5000 the 1000 would generally be included in box one of the W2 which means it would be subject to the the federal income tax right. So the 5000 amount might be in box 10 and possibly not in box one therefore not subject to the federal income tax that's the part you're getting the benefit from. Now also note we have the age test for the children. But if they were over 12 and disabled at the time to the age test under under 13 was it the age test. So if they were over that age but disabled then that would be kind of an exception to that general age test rule. And then you also want to be looking into the idea of if the care provider is the taxpayers household employee. Because you want to make sure that if they you have an household employee that you're properly calculating this credit as well as properly dealing with the household employee situation and seeing if you need to be dealing with like payroll taxes social security and Medicare and that kind of stuff. Also remember that the EIN number here would be the typical thing that you would get from an institution if it's a if it's a institution of some kind other than that then you would think the it would be a social security number and SSN.