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It's Summer!  Woohoo! School's out!!  Yay, right?  Well sure, for some people -teachers of course, stay-at-home moms, and those who have banked weeks' worth of paid time off, ready to take some great family vacations.  But what about those parents who have to work or go to school?  Summer vacation can mean additional expenses for child care that can rise into the thousands.  A local child care facility in our area charges $140 per week per child.  For my two children to attend, that would be $1,120 per month - more than many people even pay for housing each month!  For a family not accustomed to paying for child care during the school year, that hits the budget pretty hard.

The good news is that there is a tax credit available to offset the cost of some of this child care expense for dependents under the age of 13.  A credit is better than a deduction in most cases, because it is in "real" dollars.  For instance, a $1,000 credit means you get $1,000 whereas a $1,000 deduction simply means, according to your particular tax bracket, you are taxed at $1,000 less, which in real dollars, may only mean $250 if you are in the 25% bracket, or even less - $100 if you are in the 10% bracket.

Like anything else with IRS, there are some restrictions and rules to this credit.  First of all, the child care MUST be used to allow the parent (or both parents, if filing married-joint) to work, look for work, or attend school.  This credit is generally disallowed if one parent is not working (unless that parent is mentally or physically incapable of caring for him or herself).  Unfortunately, it is also disallowed if one parent files a Schedule C with a loss, or the only job is a partnership which has a loss.  Personally, I disagree with that reasoning, but it's the rule.  I assume it's written that way to prevent people from filing bogus Schedule C's with minimal losses just to claim the credit.  But, I know many people who are working hard in their new businesses, taking the hit of paying out-of-pocket to build that business, and having to pay for child care while they do it, with no relief from this credit.  But that's another soapbox for another day . . .

The credit itself starts at 35% of the expenses claimed, with a maximum of $3,000 of expenses for the first dependent, and $6,000 if there is more than one.  In plain English, the absolute maximum credit for one dependent is $1,050, and $2,100 for two or more dependents. 

Now, it wouldn't be IRS if they left it that simple.  So, the maximum credit is only allowed for taxpayers with an AGI of $15,000 or less.  It decreases by 1% for every $2,000 of increased AGI or fraction thereof.  The minimum percentage is 20%, used by those with an AGI greater than $43,000.  And keep in mind, this is of the actual expenses paid - not everyone will get the maximum, or even the maximum of the minimum.  Say you only spend $2,000 in child care over the course of the year, and your AGI is over $43,000, you would only get a credit of $400 (20% of the $2,000 spent).

The part that is fun about this credit though, is that while IRS is specific in how it is to be used, there are some things that can be "out-of-the-box" and still qualify.  IRS is very specific that you can NOT claim expenses to an OVERNIGHT camp.  However, nothing says that you can?t claim expenses for a DAY camp.  Many of these are run at various times through the summer.  I rely on them heavily, myself (4-H, YMCA, Sport Camps, etc.)  Also, payments to a relative may be qualifying expenses, unless it is your own dependent, or if it is your own child under the age of 19. You can't pay your 18-year-old to watch younger siblings and claim the credit, even if you no longer claim the 18-year -old as a dependent.  The catch with this though, is that you MUST include the payee's SS# or Tax ID# on your return as receiving the income - which means, IRS will be looking for that income on their tax return. 

I've specifically discussed this credit in regard to child care.  However, this credit is actually available for any qualifying child or qualifying relative of the taxpayer, including a spouse, who is mentally or physically incapable of caring for him/herself, and has the same primary home as the taxpayer for more than half of the year. 

Everyone's situation is unique - this may work for you or it may not.  If you have any questions about this credit, and how it may benefit your individual situation, let me know!

Last Updated by Admin on 2012-06-06 12:03:16

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Posted in General

One of the first questions I get asked by people is, "Why should I use a CPA instead of another tax preparer?"

I know the reason they ask. CPA's traditionally may cost more for tax preparation than the franchises or non-enrolled preparers (but not always, and not as much as you would think). The difference is the expertise, quality and experience. It's just like paying $1 for a burger at a fast food burger joint vs $10 at a nice restaurant. Sure, either one will fulfill the basic needs. They will provide nourishment and prevent you from starving. But, which one will be more satisfying? And which one will give you heartburn later on?

CPA's are expected to meet a higher standard. There are minimum requirements to even apply for the CPA exam (generally exceeding a Bachelor's degree) and even then, the passing rate is less that half. Compare that alone to the 84 hours of training one franchise firm provides its employees before they are considered "professionals." Once the CPA license is earned, continuing education is required to maintain it. Now, these are mandated by the individual states and every state has different requirements. Georgia requires that CPA's attain 40 hours per year of continuing education.

The greater benefit however, is the additional benefits you can get from a CPA. This is the service and peace of mind that comes with knowing that if there is a question regarding your return, the CPA is permitted to represent you before IRS. Un-enrolled preparers have very limited privileges when it comes to your defense. Personally, I back all of my returns with the guarantee that if your return is audited due to the preparation itself, I will represent you at no additional cost, and if the mistake is mine, I will pay the penalties resulting from it. You know, year to year, exactly who is preparing your return - I am. Not a random employee who has received a 2-week training class that may or may not be here next year when you return.

In the end, you could say, "I've got people" (I may not know who the people are - they change so frequently in my local office) or, I have a CPA - her name is Jennifer and she knows me and cares about me and my taxes.

Yeah, it's worth it.

Last Updated by Admin on 2012-03-08 15:38:00

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