Tuesday, September 4, 2012

Section 21 Child Care Tax Credit

The § 21 Child Care Tax Credit- Percentage of Child Care Expenditures


Explanation:

For a taxpayer with AGI of $15,000 or less, the credit is 35% of the credit eligible expenses. The rate of the Child Care credit is reduced by one percentage point for each $2,000 (or fraction) by which AGI exceeds $15,000 but the credit is never reduced below 20%.The credit rate hits the 20 percent floor at AGI of $43,001. Section 21 (D)(1)(B) – Could equal the income of the lowest taxpayer

§ 21 provides a credit equal to a percentage of a taxpayer’s child care expenses, if the expenses are “incurred to enable the taxpayer to be gainfully employed.” Expenses eligible for the credit are capped at $3,000 for a taxpayer with one “qualifying individual” (generally, a child under the age of 13, or another individual unable to care for himself) POLICY: Allow the person to be gainfully employed. Worried about slippery slope which could lead to tax credits and deductions. Expenses must be incurred so taxpayer can be employed. WELL BEING AND PROTECTION. NO FOOD, LODGING, OR CLOTHING. Cost of nursery school below level of kindergarten are for the child’s care.

There are lots of regulations about this, no for over night camps. Yes for day camps, even if the day camp specializes in something. Treasury Regulations Say: Allocate costs for other household services. This is only going to be a problem if a substantial amount of the services is for something else. Do not need to allocate the expenses if they are de minimis

The child care credit is limited to the income of the lowest earning spouse. If there is no income, there is no credit.

Full time student = Gainfully Employed. Deemed to have $500 a month in income to take the credit. STUDENT EXCEPTION Capped at $6,000 for taxpayer with two or more qualifying individuals. These are refundable.

POLICY: The Child Care Credit in Section 21 has more vertical equity than a deduction. Credits avoid the “upside-down” aspect of subsides designed as deductions (where a $1,000 deduction is worth more to a 28% bracket taxpayer than to a 15% bracket taxpayer).

Information about Child Credit on Tax Return
Information about Qualifying Child for Earned Income Tax Credit
2015 Earned Income Credit Chart

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