Pomerantz, Kavinoky & Company

Certified Public Accountants, Inc.

"Making Your Life a Little Less Taxing"

 

Principal Profiles

Although you can't deduct what you pay for child care, there are a number of other tax breaks that may be available for this necessary cost of keeping your job. If you skim this brief article you'll get an overview of what is available.

Child-care credit. You're eligible for a tax credit if you pay someone to watch your under-age-13 dependent child or children so that you can be gainfully employed. You must be eligible to claim a dependency exemption for such children. ( Caution: Do not confuse the child-care credit (also called the child and dependent-care credit) with the child tax credit. Parents eligible for the child-care credit are usually also eligible for the child tax credit, a $1,000 tax credit that is not dependent upon any child-care costs (except providing over half the child's support)).

The amount of the child-care tax credit has increased for tax years after 2002 enough for some who did not consider the credit to take notice. The amount of eligible employment related expenses on which you can claim the credit has risen from $2,400 to $3,000 each year for the care of one child under age 13; and from $4,800 to $6,000 for the care of two or more eligible children. The credit that most of our clients take is 20 percent of that eligible amount (the 20 percent rate applies if your income is more than $43,000). That comes to a maximum credit of $600 for one child and $1,200 for two or more children. Unlike the child tax credit, which is phased out for taxpayers above certain income levels, the child-care credit remains at the $600/$1,200 level no matter how high your income goes.

For taxpayers with incomes of $15,000, or less, the applicable percentage is 35 percent. The percentage is reduced by 1 percent for each $2,000 of income over $15,000 until the percentage reaches the 20 percent level for income or more than $43,000. The 1 percentage point decrease applies even if the taxpayer's income is just a fraction over the previous level. For example, if a taxpayer has an income of $15,002, the applicable percentage will be reduced to 34 percent.

Qualifying expenses can include the in-home related expenses of a housekeeper, babysitter or cook. Services performed by a dependent care center are allowed only if the center is certified and in compliance with all local laws. A portion of boarding-school expenses may qualify for the credit, but summer camp fees are specifically not allowed.

Employer-provided assistance. You may be fortunate enough to work for an employer that provides for tax-advantaged dependent care assistance:

Up to $5,000 of dependent-care assistance that you receive from an employer-paid nondiscriminatory child care program for employees is completely tax free (the figure is $2,500 for married filing separate income tax returns). The excludable assistance must be for the care of children for whom the child-care credit is available.

If your employer maintains a so-called cafeteria plan that lets employees choose between receiving fixed amounts of cash or qualified tax-free benefits, the amount you elect to receive for child-care assistance under the plan is tax-free if the benefit provided doesn't exceed $5,000 ($2,500 for married filing separately).

Your employer may maintain a flexible spending account that essentially allows you to choose to reduce your salary by an amount that's set aside in an account set up to pay for child-care expenses (up to $5,000 or $2,500). In effect, such a plan enables you to pay for part or all of your child-care expenses with pre-tax dollars.

If you're provided with some form of employer-provided assistance other than an outright cash payment of eligible expenses, you may need to consider whether to use the cafeteria plan or flexible spending account or pay for the care expenses with your own cash and claim a tax credit. If you are in this position, a decision must be made well before the beginning of each year. We can tell you which choice will save you the most from a financial and a tax perspective in your circumstances. We can also fully explain any other tax issues related to your choice of child care, including your payroll tax responsibilities if you decide to have someone help with a child in your home. Please give us a call.