 Income tax 2022-2023 Child and Dependent Care Expenses Credits. Can you claim the credit? Let's do some wealth preservation with some tax preparation. 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. 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. Be looking at the income tax formula. We're down at the bottom in the credit area. Remember on the first half of the income tax formula is in essence an income statement. The bottom line taxable income being similar to the bottom line of the income statement. Net income we then take that taxable income calculate the tax not with a flat rate not with a flat tax but with a progressive tax system to get to the tax before credits and other taxes. Then we're finally going to be dealing with those credits and other taxes like self employment tax for example. And then we have the payments that we have made either with withholdings or estimated tax payments to get to the tax refund or tax due the bottom line. Also remember that when we think about these credits we can break them out into categories of refundable credits and non refundable credits. The non refundable credits are those that aren't going to take the tax liability below zero. The refundable credits can possibly take the tax liability below zero resulting in the tax code being used as like a benefit or welfare program in those instances. Also remember that the credits are similar to deductions and that we like them both but if we had a dollar credit versus a dollar deduction we would typically rather have the credit because that's when we would usually get the full benefit of the dollar credit as opposed to a dollar deduction simply decreasing the taxable income and our benefit then will be reflected or a result of the tax rate on that. Alright can you claim the credit? We're talking about the child and dependent care expense credit. This is separate from the child tax credit. The child tax credit is fairly straightforward. If you have a qualifying child you may qualify for the child tax credit. When we talk about the child and dependent care expenses credit sounds similar but we're talking about those expenses for the child care and typically the idea would be that you have to incur those expenses so that the parent the caretaker could work or look for work. That's the general idea we want to be keeping in mind. Alright to be able to claim the credit for child and dependent care expenses you must file form 1040, 1040 SR, 1040 NR and meet all the tests in tests you must meet to claim a credit for child and dependent care expenses. So tests you must meet to claim a credit for child and dependent care expenses to be able to claim the credit for child and dependent care expenses you must meet all of the following tests. Number one, qualifying person test. The care must be for one or more qualifying persons who are identified on form 2441. See who was qualifying person. We'll talk about that possibly more later. Number two, earned income test. You and your spouse of filing jointly must have earned income during the year. So this is similar to the concept of that of the earned income credit, meaning the credit actually basically goes up as you have earned income. Although the justification might be a little bit different here. When we talk about the earned income credit, the rationale is that they want to incentivize people to be working. Here they still want to be incentivizing people to be working, but the whole idea of the credit is that you have these expenses so that the people could be working. So you would expect that if that were the case that you'd have some earned income for the year. However, see rule for student spouse or spouse not able to care for self under you must have earned income later. So there may be some exceptions to the rule. You might be saying, well, what if I'm trying to get schooling so that I can then earn money at a future point in time? Shouldn't that justify the credit or something like that? Number three, work related expense test. You must pay child and dependent care expenses so you and your spouse finally jointly can work or look for work. See, are these work related expenses later? That's the idea of the credits you want to be keeping in mind. So when we look at these rules, you want to keep that in perspective. So the rules aren't just these vague floating rules that we have to check off, but rather you would think that they would make some rational sense given the general justification for the credit, which is to allow people to work and get the childcare necessary to do so. So number four, you must make payments for child and dependent care to someone you and your spouse can't claim as a dependent. So obviously, if you're making the expenses to like your other kid or something like that, that's going to be a complicated things to be writing off on the tax code because you might just be given the money for other reasons or whatever you're writing off payments to the kid. So if you make payments to your child, including stepchild or foster child, he or she can't be your dependent and must be age 19 or older by the end of the year. You can't claim the payments to A, your spouse. So you can't say, yeah, I just paid my spouse. You're one taxable entity. You can't take a deduction for paying your spouse B, the parent of your qualified person. If your qualified person is your child and under age 13. Again, one more time, B, the parent of your qualified person. If your qualified person is your child and under age 13. Five, a joint return test. Your filing status may be single, head of household or qualifying surviving spouse. If you are married, you must file a joint return unless an exception applies to you. So in other words, when you're married, you can file married or married filing separate. When you're single, you may be able to file head of household if you have the capacity to do that, which you would think you would be doing because a dependent is one of the main things or single. If you're married though and you choose to file married filing separate, you'll often lose some of the capacities to some of these credits because the IRS is suspicious that you're going to abuse the system by separating to married filing separate in order to take advantage of some of the credits. So typically when these are involved, these credits, you would be more beneficial to file married filing joint as an overall tax entity perspective. Six, provider identification test. You must identify the care provider on your tax return. See care provider identification test later. So you can't just be like, you know, I just paid somebody or whatever. You got to tell us who you got to tell the IRS who you paid to legitimize the whole situation. Number seven, if you exclude or deduct dependent care benefits provided by a dependent care benefit plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses, generally $3,000. If you had one qualifying person or $6,000, if you had two or more qualifying persons in order for you to claim a credit on the remaining amount. So if you had two or more qualifying persons, the amount you exclude or deduct will always be less than the dollar limit because the total amount you can exclude or deduct is limited to $5,000. See reduced dollar limit under how to figure the credits later. All right. So who is a qualifying person then? Who's a qualifying person? Your child and dependent care expenses must be for the care of one or more qualifying persons. A qualifying person is one, your qualifying child who is your dependent and who was under age 13 when the care was provided. So that would probably be the most common kind of example. You have a dependent. The dependent is a child. Notice we have the age tests here that we want to keep in mind. Again, we thought about dependent to qualify as a dependent. Then we saw ages like at 19 or 24 or if they're a student, could they qualify for the child tax credit, which is not this credit? This is the child independent care expenses credit. The child tax credit had like a 17 threshold to qualify for that. And now we've got a 13 age threshold for the child independent care expenses. So once again, number one, your qualifying child who is your dependent and who was under age 13 when the care was provided. But see child of divorced or separated parents for parents living apart later. Number two, your spouse who wasn't physically or mentally able to care for himself or herself and lived with you for more than half the year or three. A person who wasn't physically or mentally able to care for himself or herself lived with you for more than half the year. And either A was your dependent or B would have been your dependent, except that I he or she received gross income of 4,400 or more to he or she filed a joint return or three. You or your spouse if filing jointly could be claimed as a dependent on someone else's 2022 return. All right, dependent defined. What is a dependent? A dependent is a person other than you or your spouse for whom you could claim an exemption to be your dependent. A person must be your qualifying child or qualifying relative. So we talked about a dependent. You can look at the form 1040 instructions and see the qualifications for a dependent. Claiming and exemption is kind of like an old terminology because it used to be that you had a dependent and you would get the exemptions for the dependent. So that's still in this publication, but you can dive into more details in terms of qualifying as a dependent in and of itself. I would go to the form 1040 instructions to start down that path. So however, the deductions for personal and dependency exemptions for tax or 2018 through 2025 are suspended and therefore the amount of the deduction is zero. But in determining whether you may claim a person as a qualifying relative for 2022, the person's gross income must be less than $4,400. All right, qualifying child. To be your qualifying child, a child must live with you for more than half the years. Now we've got that living with you test again and meet other requirements. So more information for more information about who is a dependent or a qualifying child. You can see publication 501. So you can find that on the IRS website. You can also go to the form 1040 instructions you can find on the IRS website physically or mentally not able to care for oneself. Persons who can't dress, clean or feed themselves because of physical or mental problems are considered not able to care for themselves. Also, persons who must have constant attention to prevent them from injuring themselves or others are considered not able to care for themselves. Person qualifying for part of year. So you determine a person's qualifying status each year. For example, if your child for whom you paid child and dependent care expenses turns 13 years old and no longer qualifies on September 16th, count only those expenses through September 15th. Also, see yearly limit under dollar limit later. All right, birth or death of otherwise qualifying person. And determining whether a person is a qualifying person, a person who was born or died in 2022 is treated as having lived with you for more than half 2022. If your home was the person's home more than half the time he or she was alive. So if someone was born or died and you say they have to live with you for half of the year, well, then that's going to get a little bit messy. That test you like that doesn't make this not exactly fair because they weren't here the whole half of the year. So then you have to have that exception. So taxpayers identification number you must include on your return the name and taxpayer identification number generally the SSN social security number of the qualifying person persons. So if the correct information isn't shown, the credit may be reduced or disallowed individual taxpayer identification number. That's the I-10 for aliens. So if your qualifying person is a non resident or resident alien who doesn't have and can't get an SSN social security number, use that person's I-10. The I-10 is entered wherever an SSN is requested on a tax return. In that case, if the alien doesn't have an I-10, he or she must apply for one. C-Form W7 application for IRS individual taxpayer identification number for details and I-10 is for tax use only. It doesn't entitle the holder to social security benefits or change the holder's employment or immigration status under U.S. law. All right. And then we have the adoption taxpayer identification number. That's the A-10. If your qualifying person is a child who was placed in your home for adoption and for whom you don't have an SSN social security number, you must get an A-10 for the child. So you could file form W7A application for taxpayer identification number for pending U.S. adoptions in that case. Child of divorced or separated parents or parents living apart. So even if you can't claim your child as a dependent, he or she is treated as your qualifying person if the child was under age 13. So we got that 13 age test or wasn't physically or mentally able to care for himself or herself. The child received over half his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance or separated under a written separation agreement or lived apart at all times during the last six months of the calendar year. The child was in the custody of one or both parents for more than half the year and you were the child's custodial parent. All right. So the custodial parent is the parent with whom the child lived for the greater number of nights in 2022. So they fall back on that, you know, who did the child live with more test. So if the child was was with each parent for an equal number of nights, which could quite well be the case because you might have that split custody kind of situation. The custodial parent is the parent with a higher adjusted gross income. The assumption there I believe being if it's a split custody, then the home living with each parent is equal. But you would think the person with a higher adjusted gross income would be would be paying for more of the expenses for details and an exception for a parent who works at night. See publication 501. The non custodial parent can't treat the child as a qualified person, even if that parent is entitled to claim the child as a dependent under the special rules for a child divorced or separated parents. So you must have earned income. So to claim the credit you and your spouse of filing jointly must have earned income during the year. So remember that that kind of falls back to you know what the idea of the credit was for what the and it's to help people to to be able to work. That's why you're paying for the for the child care. So earned income earned income includes wages, salaries, tips, other taxable employee compensation and net earnings from self employment like a schedule C. A net loss from self employment reduces earned income. Earned income also includes strike benefits and any disability pay you report as wages. Generally only taxable compensation is included. For example, for an earned income you exclude from income isn't included. So you got for an earned income. Well now it's excluded. So it's not going to help you out with the credit to have the earned income is the general idea. However, you can elect to include non taxable combat pay and earned income. So that combat pay we saw it with the child with the earned income tax credit applies here as well. You have some flexibility. The idea being here that they're saying hey you don't have to possibly include combat pay and income therefore not paying taxes on it, which is usually good. But then you have these weird situations where you're like well maybe it would be good to have the combat pay and income for some of these credits because you need income. So you might be able to include it in income for some of these credits. So if you are filing a joint return and both you and your spouse received non taxable combat pay you can each make your own election. In other words, so if one of you makes the election the other one can also make it but doesn't have to including this income will give you a larger credit only if your or your spouse's other earned income is less than the amount entered on line 3 of form 2441. Tip, you can elect to include your non taxable combat pay and earned income when figuring your credit for child and dependent care expenses even if you elect not to include it in earned income for the earned income credit or the exclusion for deductions for dependent care benefits. So now you've got a lot of combinations with that combat pay, right? You're like alright it's not included in wages on line 1 of the W-2 so it's not included for federal income taxes but then with the earned income tax credit maybe I want to include it as earned income with that credit but then with this credit maybe I don't want to include it in earned income for that credit and so on. Alright, so members of certain religious face opposed to social security. So this section is for persons who are members of certain religious face that are opposed to participating in social security act programs and have an IRS approved form that exempts certain income from social security and Medicare taxes. So honestly, like, can I just exempt out of paying the social security because I'm not sure it's going to be paying off by then again. Form 4361 application for exemption from self employment tax for used by ministers, members of religious orders and Christian science practitioners and form 4029 application for exemptions. For exemptions from social security and Medicare taxes and waiver of benefits for used by members of recognized religious groups. So each form is discussed here in terms of what is or isn't earned income for purposes of child and dependent care credit for information on the use of these forms. You can see publication 517 social security and other information for members of the clergy and religious workers. Alright, so are these work related expenses. So the child and dependent care expenses must be work related to qualify for the credit expenses are considered work related only if both the following are true. So they allow you and your spouse to filing jointly to work to work or look for work. That's the point of the credit. Once again, they are for a qualifying person's care. So work or looking for work. What does that mean? Then let's get to the specifics to be work to be work related. Your expenses must allow you to work or look for work. If you are married, generally both you and your spouse must work or look for work. So notice this is a this is one of those areas again where it would seem like being married is almost kind of like like bad for the credit in some ways. Right, because if you were single, you would you would qualify for the credit if you had work yourself. Right, and then but if you're married, both the spouses would have to be qualifying for work because the idea would be that if one spouse was not working, then they could take care of the child, which is the traditional structure of the traditional family structure. So the kind of idea I believe here would be saying, well, if you're not in the traditional family structure kind of concept, meaning you're a single person with a child, then in order to work, you would have to be paying for this care. And that would be the idea. If you're married situation, then you would think that if your income is below the threshold where both parents, you know, have to work or choose to work or what that's when you would need the child care, you would think. But if one parent wasn't working with married, then you would think they would have the time to take care of the child possibly. Okay, so once spouses treated as working during any month, he or she is a full time student or isn't physically or mentally able to care for himself or herself. So your work can be for others or in your own business or partnership. It can be either full time or part time. So part time work still counts and it can be either in or out of your home. So work. So you can still work in the home possibly still and still qualify even though you might still have some capacity to take care or at least look out to some degree of a kid and that kid. So work also includes actively looking for work. So this is where it gets a little bit, a little bit shady, a little bit more difficult because now you're actively looking for work. Well, what does that exactly mean? Right. So however, if you don't find a job and have no earned income for the year, you can't take this credit. So it doesn't mean that you can't have no earned income and just say, yeah, look, I sent out a few resumes. But so see, see, you must have earned income earlier. So you got to have earned income. So an expense isn't considered work related merely because you had it while you were looking while you were working because because you had it while you were working. The purpose of the expense must be to allow you to work. That's the idea. So whether your expenses allow you to work or look for work depends on the following facts. Let's look at example one, the cost of a babysitter while you and your spouse go out to eat isn't normally work related expense. Example two, you work during the day, your spouse works at night and sleeps during the day. So you pay for care of your five year old child during the hours when you are working and your spouse is sleeping. Your expenses are considered work related in that instance because obviously that's the idea you're working around the two people that are having their work schedules formatted. So care of the qualifying person. So to be work related, your expenses must be to provide care for a qualifying person. You don't have to choose the least expensive way of providing the care. The cost of a paid care provider may be an expense for the care of a qualifying person even if another care provider is available at no cost. So it's not like you have to choose the cheapest option for the expenses to qualify. Expenses are for the care of a qualifying person only if their main purpose is the person's well-being and protection. Expenses for household services qualify if part of the services is for care of qualifying persons. So now if you have some crossover, if you have household care, you can imagine, well, there might be more to the job than just the qualifying person. So you can see household services later for more information there. Expenses not for care. So expenses for care don't include amounts you paid for food, lodging, clothing, education and entertainment. These are not the care items. Those are the normal things. So however, you can include small amounts paid for these items if they are incidental to and can't be separated from the cost of caring for the qualifying person. Otherwise, see the discussion under expenses partly worked related later. Okay, child support payments aren't care for and don't qualify for the credit. So child support payments between spouses. You're basically paying another spouse who is also a parent. So you would think that wouldn't qualify. Alright, education, expenses for a child in nursery school, preschool or similar programs for children below the level of kindergarten are expenses for care. So that's kind of a common example. Expenses to attend kindergarten or a higher grade aren't expenses for care. Don't use the expenses to figure your credit. However, expenses for before and after school care of a child in kindergarten or a higher grade may be expenses for care. Summer school and tutoring programs aren't for care. Let's look at an example, shall we? You send your three year old child to a nursery school while you work. The nursery school provides lunch and a few educational activities as part of its preschool childcare service. So the lunch and educational activities are incidental to the childcare and their cost can't be separated from the cost of care. You can't count the total cost when you figure the credit. So you're going to say you're paying for this stuff. They included some meal. A meal, you say? A meal? It's in it, but the meals aren't the biggest part of the cost of the care. They're incidental. You might call them immaterial in essence to the total cost and therefore you'd be able to deduct it. So example two, or deduct or credit, count it towards the credit. Example two, you are a member of the armed forces and you are ordered to a combat zone to be able to comply with the order. You place your 10 year old child in a bordering school. Only the part of the bordering school expense that is for the care of your child is a work related expense. You can count that part of the expense and figure in your credit if it can be separated from the cost of education. You can't count any part of the amount you pay the school for your child's education. So notice it gets a little hard to parse here because obviously now you're talking about a situation where it was done for work. But it's the other purposes for education, which is not the primary goal of the credit, which is supposed to be to allow people to get care for work. So care outside your home. You can count the cost of care provided outside your home if the care is for your dependent under age 13 or any other qualifying person who regularly spends at least eight hours each day in your home. So dependent care center. You can count care provided outside your home by a dependent care center only if the center complies with all state and local regulations that apply to these centers. So a dependent care center is a place that provides care for more than six persons other than persons who live there and receives a fee, payment or grant for providing services for any of those persons even if the center isn't run for profit.