 Income tax 2022-2023. Child and dependent care expenses credit overview. Let's do some wealth preservation with some tax preparation. 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. Most of this information comes from Publication 503 Child and Dependent Care Expenses Tax Year 2022 you can find on the IRS website irs.gov irs.gov. Looking at the income tax formula we're down here on the credit area at the bottom of the formula remembering the first half of the income tax formula is in essence an income statement although a strange one ending at taxable income the equivalent of an income statement ending at net income income minus expenses income minus deductions then we're going to be calculating the tax on that taxable income not using one rate not a flat tax system but using the progressive tax system to get to the tax before credits and other taxes but we can't stop there then we have to think about those credits and other taxes like self-employment tax and then we have to think about how much we paid in with estimated tax payments or withholdings to get to the bottom line tax refund or tax due also remember credits and deductions are both good and that we like both of them however they're different in that if we had a dollar of credit versus a dollar deduction we would typically rather have the credit because we get the full benefit of the dollar credit as opposed to a deduction in a deduction we would be reducing the taxable income and the benefit we would get would be dependent upon our tax rate however if we get the credit we typically get the full credit also note that we have these two categories of credits non-refundable credits and refundable credits that's why we have these two kind of line items down here that have credits involved in them the non-refundable credits don't take the tax liability below zero the idea being that if you took the tax liability below zero it wouldn't be a tax at that point in time because it would be more of a benefit type of program a welfare type of program but the refundable credits do take the liability below zero and is using the tax code in that kind of way making it like a welfare or benefits type of program okay that said we want to go into what's new first and then we'll get into the nitty and the gritty with the expenses first thing i just want to point out here is that the child and dependent care expenses credit is not the same as the child tax credit we've talked about the child tax credit before which is fairly straightforward because you have a qualifying child to see if you would qualify for the child tax credit it's a little bit more complicated to think about the child and dependent care expenses credit because now you have expenses that are related to the care of the child and the credit is going to be based on those expenses so the two different credits all right so what's new with it so the 2021 enhancements to the credit for the child and dependent care expenses have expired so this is kind of a common theme you'll recall when the covid thing happened then a lot of the response to it was through the tax code where they sent out stimulus payments and all that kind of stuff and they also inflated some of the credits including the child tax credit and whatnot as well as this child and dependent care expenses credit and then in my opinion it looks like they kind of overspent which at least contributed to inflation which i think in the long run will probably hurt more people than the short run cash flow helped but that's just my opinion but now of course they have to reel that back in so that they're tightening the belts here which is they're tightening your belts right they're tightening our belts so that's what we have here and so the changes to the credit for the child and dependent care expenses for 2021 under the American Rescue Plan Act of 2021 have expired for 2022 the credit for child and dependent care expenses is non-refundable so it doesn't go below the zero threshold as opposed to the child tax credit and the earned income tax credit the big ones that have that refundable component and you may claim the credit on qualifying employment related expenses up to three thousand dollars if you had one qualified person or six thousand dollars if you had two or more qualified persons the maximum credit is 35 percent of your employment related expenses the more you earn the lower the percent of employment related expenses that are considered in determining the credit so you have that phase out kind of concept in place so once your adjusted gross income is over 43 thousand dollars the maximum credit is 20 percent of your employment related expenses so see the table under amount of credit later so we'll dive into some more details in a bit here for additional information about the credit you can see form 2441 and its instructions available at the irs.gov website all right so the 2021 enhancements to dependent care benefits have expired as well so another kind of item they changed a lot of things in 2021 they're kind of going back to the norm that was in place before that whole thing so the changes to dependent care benefits under the american rescue plan act of 2021 have expired for 2022 the maximum amount that can be excluded from an employee's income through a dependent care assistance program is five thousand dollars two thousand five hundred if married filing separately dependent care benefits are reported on form 2441 line 12 temporary special rules for dependent care uh flexible spending arrangements fsa's so section 214 of the taxpayer certainty and disaster tax relief act of 2020 provides temporary covid 19 relief for dependent care fsa's this legislation allows employers to amend their dependent care plan to allow unused amounts to be used in subsequent years unused amounts from 2020 and or 2021 are added to the maximum amount of dependent care benefits that are allowed for 2022 so for more information you can see the line 13 instructions in the instructions for forum 2441 notice 2021-15 2021-10 and there's some more information you could take a look at here to find that information if you want to dive into that in more detail all right let's get into the reminders personal exemption suspended so for 2022 you can't claim a personal extension for yourself your spouse or your dependence so that's been in place for a little while here you'll recall that there used to be a kind of a system where when you had a dependent you would say what's the major benefit of say having a dependent one was that you had an exemption which was kind of like a deduction for them in an exemption for yourself and so on and so forth they in an attempt to simplify the tax code they basically removed the exemptions and they adjusted the the major benefit would be the credit the credits that would be uh that you'd get for like a dependent for example so taxpayer identification number needed for each qualifying person you must include online to a form 2441 child and dependent care expenses the name and taxpayer identification number generally the social security number ssn of each qualifying person see the taxpayer identification number under who is a qualifying person we'll talk about that later but clearly if you're going to be having a credit related to a qualifying child for these expenses then you can have to give them a number related to them because the iris sees them as a number typically the social security number you may have to pay employment taxes so if you pay someone to come to your home and care for your dependent or or spouse you may be a household employer who has to pay employment taxes so in other words if you're in a situation of course where where someone is basically working for you in your home then the question is well now are they a contractor no it looks more like they're going to be an employee type of situation where you're going to be subject usually to to payroll but you might at least have employment taxes with regards to it right social security and medicare that you have to deal with in certain situations so usually you aren't a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business see do you have a household employee later all right let's get into the introduction this publication explains the tests you must meet to claim the credit for child and dependent care expenses it explains how to figure and claim the credit that's what we want to know you may be able to claim the credit if you pay someone to care for your dependent who is under age 13 so we have another kind of age test here you'll recall when we thought about age tests with regards to do can they be claimed as a dependent where we had 19 or 24 if they're a qualifying or if they're a student for example do they qualify for the child tax credit we had an age test of like 17 I believe and now we've got this age thing here of 13 so you got to keep all these kind of ages in your mind so who is under age 13 or for your spouse or dependent who isn't able to care for himself or herself the credit can be up to 35 percent of your employment related expenses to qualify you must pay these expenses so you and your spouse if filing jointly can work or look for work so that's the general thrust of the the aim of this credit what's the aim of the credit to allow people to work or look for work so you're now paying for care for the child in order to do that and so a lot of the rules that we want to think of we want to think of from that perspective why does this rule make sense because you would think they're trying to design the law so that they're giving you a benefit if these expenses are in alignment with allowing you to work or look for work all right so this publication also discusses some of the employment tax rules for household employers now if part of what you're doing then in order to work is not taking your child to someone to someone else for care or something like that to allow you to work or search for work but hiring someone as an household employer then you get into the situation of is the person just like any kind of schedule C kind of thing which is are you hiring this person as an employee or are they an independent contractor is the general kind of idea if they're working in your home and you have complete control and you set the hours and all that kind of stuff it's looking more and more like they are an employee or a house and you're a household employer which means you may have to deal with the payroll tax kind of stuff social security and Medicare in essence so dependent care benefits if you receive any dependent care benefits from your employer during the year you may be able to exclude all or part of them from your income you must complete form 2441 part three before you configure the amount of your credit see dependent care benefits under how to figure the credit later so we'll dive into that at a future point useful items you may want to see so you got publications so the so some of the gray areas if you want to get into more detail for the research here are some publications you can find on the iris website so you got 501 dependence so obviously much of this is going to be related to to someone qualify as a dependent so there's some overlap there the standard deduction and filing information so then we've got the 926 household employers tax guide so if you're in a situation where now you're solving this problem of being able to work by having care of someone who's a household employer then you can dive into that issue which could deal with social security and Medicare and whether you are a household employer form and instructions so you've got the form 2441 child and dependent care expenses so obviously you can look up that form and related instructions schedule H form 1040 household employment taxes and w10 dependent care providers identification and certification