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Form 2441 CPA explains the Child and Dependent Care Credit | day care tax credit

CPA Wilmington NC explains Form 2441, the Child and Dependent Care Care Credit

The IRS encourages folks with kids to work. Here’s a primer on Form 2441. I’d skip the Form 2441 instructions and read IRS Publication 503, Child and Dependent Care Expenses, instead. If you need a free consult with a CPA tax accountant, call us at 399-2705.

Form 2441 CPAs know how expensive child day care is. Even after years of tax preparation experience I’m sometimes shocked by the day care’s annual statement. The IRS offers a child day care tax credit. Use Form 2441, The Child and Dependent Care Credit, to calculate the credit and then integrate the result into your Form 1040.

IRS tax Form 2441,The Child and Dependent Care Credit, calculates a tax credit for Folks who paid someone to care for their child. I think the IRS reasoning is that child day care costs are so expensive that a tax incentive  encourages parents to work. The IRS Form 2441 instructions cover a broad range of circumstances. But most tax software make Form 2441 preparation a snap, even without the instructions. IRS Publication 503, Child and Dependent Care Expenses, reads better than the actual Form 2441 instructions in my opinion.

I would rather generate a tax credit than an a tax deduction for Clients. Why? A tax credit directly reduces the amount of taxes I’ll pay. A dollar of credit reduces my tax liability, generally speaking, by a dollar. Sometimes even generating a tax refund beyond a zero tax liability.  But a dollar of deduction just reduces my taxable income by a dollar, which might only mean reducing my taxes 25 cents or less.

Form 2441, The Child and Dependent Care Credit

I think most Form 2441 CPAs would agree 2441 is a typical IRS tax form; your potential credit looks good at the top of the form, but gets whittled away as you move down Form 2441.

Here are some key aspects of Form 2441:

  • Children must be 12 years old or younger to qualify for the credit on Form 2441.
  • Other dependents, besides your child, may qualify for the credit, too.
    • Generally these “non-child” individuals must be physically or mentally unable to care for themselves.
    • So there are multiple criteria to satisfy on Form 2441, as with most IRS issues.
  • The qualifying child or dependent generally must live with you for over half the year. But there are exceptions.
  • You must incur the qualifying child care expenses during work or while looking for work.
    • So the child care can’t be just for your convenience or recreation.
    • If, say your in-laws, pay for day care directly, neither you or they get the Child and Dependent Care Credit.
      • Your in-laws can generally gift you the daycare expenses without tax consequences to either party
      • Then you can pay the daycare costs directly.
  • Your Form 1040 tax preparation has to show earned income.
    • This doesn’t just mean from employment and reported on a W-2.
    • Self employment from Schedule C qualifies, too.
    • The IRS defines earned income, for this credit, precisely, but differently and more broadly, than you might expect. Don’t give up on the credit too soon.
  • The 2014 limits aren’t out yet, but I expect qualifying day care fees to be $3,000 for one child or up to $6,000 for two or more kids. So a $6,000 max.  But this can be deceiving – see below. In addition you can’t claim child care fees provided by your employer.
  • The child care fees can’t be paid to your spouse or another of your children.
  • You can’t file Form 2441 with Married Filing Separately status.
  • Be aware if you paid someone to provide care at your home; you could be liable for the Nanny Tax.  See our other posts on the Nanny Tax.  15.3%.  Ouch!
  • You must identify the individual or company you paid, including their Social Security or Employer Identification Number.  There is Form W-10, Dependent Care Provider’s Identification and Certification.  The IRS is great at cross-correlating information.
  • File Form 2441, Child and Dependent Care Expenses, with Form 1040 to claim the Child and Dependent Care Credit.
  • The actual credit maxes out at 35% of the qualifying child care fees paid, which remember, can’t be more then $6,000.  And the percentage phases out as your Adjusted Gross Income increases.

So, why is Form 2441 so complex? Well I think it’s because some folks bent the truth about day care expenses and the IRS countered by demanding cross referencing info they can tie to.

We’re a CPA firm in Wilmington NC, but serve a larger geographical base through our virtual office.  So if you like our attitude and friendly expertise in these posts, give us a call at (910) 399-2705 for an initial free consult.

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