Chapter 6 - Credits Flashcards
Nonrefundable credits
the combined amount of these credits cannot reduce the taxpayer’s tax liability below zero. Some examples of nonrefundable credits include the Child and Dependent Care Credit, the Saver’s Credit, the Child Tax Credit, and the Foreign Tax Credit.
Refundable credits
may reduce the taxpayer’s tax liability below zero, and the difference is refunded to the taxpayer. Refundable credits are included in the Payments section of Form 1040. Examples of refundable credits include the Earned Income Credit and the Additional Child Tax Credit.
Requirements to claim child and dependent care credit
Qualifying Person. The care must be for one or more qualifying persons.
Filing Status. The taxpayer’s filing status must be single, head of household, qualifying surviving spouse, or married filing jointly. There is an exception for married taxpayers not filing a joint return. (See Taxpayers Filing Married Filing Separately below for an exception.)
Work-Related Expenses. The care must have been provided so the taxpayer (and the spouse, if married) could work or look for work. (There is an exception if the taxpayer or spouse are full-time students or disabled.)
Earned Income. The taxpayer must have some earned income. Taxpayers who are married and are living together must both have earned income, unless one spouse was a student or disabled, as explained later.
Payee Test. The person who provided the care (payee) must not be:
The taxpayer’s spouse.
The parent of the qualifying person if the qualifying person is under the age of 13 and the taxpayer’s child, or
Someone the taxpayer can claim as a dependent.
Services provided by the taxpayer’s child under age 19 do not qualify, even if the provider is not a dependent. Only if the taxpayer’s child is age 19 or older and cannot be claimed as a dependent will the services be eligible for the credit.
Provider Identification. Care provider information must be provided on the tax return. This includes their name, street address, and taxpayer identification number (SSN, EIN or ITIN). Form 2441 documents all of the required information.
Credit/Exclusion Coordination. Not have dependent care benefits provided by a dependent care benefit plan that are more than the limit for qualifying expenses. This is discussed in more detail on the Form 2441 and Employer-Provided Benefits page later in the chapter.
Qualifying Persons
Qualifying persons
A qualifying child who can be claimed as a dependent and has not reached their 13th birthday when the care was provided.
The taxpayer’s spouse, who is physically or mentally incapable of self-care and lived with the taxpayer for more than half of the tax year the credit is claimed.
A disabled person of any age who is physically or mentally incapable of self-care, who lived with the taxpayer for more than half of the tax year in which the credit is claimed, and who the taxpayer claims as a dependent.
Considered unmarried
The taxpayer paid over half the cost of maintaining a household for the year.
The home was the principal residence of both the taxpayer and a qualifying person for more than half the tax year.
During the last six months of the tax year, the taxpayer’s spouse was not a member of the household.
Qualified expenses
Qualified child or dependent care expenses are those incurred for the primary purpose of assuring the wellbeing and protection of a qualifying person while the taxpayer works or looks for work.
Expenses for care provided outside the home for the child, disabled dependent, or disabled spouse can be counted, provided the qualifying person regularly spends at least eight hours each day in the taxpayer’s home. If the care is provided in a dependent care center (one that cares for more than six persons for a fee), the center must comply with all relevant state and local laws.
Certain expenses do not qualify for the Child and Dependent Care Credit. The cost of transportation to and from the child care facility by someone other than the care provider does not qualify, and neither do overnight camp expenses. Also, any expense allocable to the education of a child in kindergarten or higher does not qualify. The total cost of schooling below kindergarten qualifies only if the cost of schooling cannot be separated from the cost of care.
Expenses for in-home care of a child, disabled dependent, or disabled spouse also qualify for the credit.
Qualified expenses for in-home care may include:
Amounts paid for cooking and light housework related to the care of a qualifying person, as well as actual care. Amounts paid for chauffeur or gardening services do not qualify.
Gross wages paid for qualified services, plus the cost of meals and lodging furnished to the employee, plus the employer’s share of the social security, medicare, FUTA (federal unemployment), and any other payroll taxes paid on the wages.
Expenses that do not qulaify
A person who either the taxpayer or the spouse may claim as a dependent.
The taxpayer’s spouse.
A parent of the qualifying person under age 13 (if the qualifying person is the taxpayer’s child).
The taxpayer’s child who is under age 19, even if they are not the taxpayer’s dependent.
An overnight camp.
Earned income excludes
Child support payments received by the taxpayer.
Excluded foreign income.
Income of nonresident aliens that is not effectively connected with a U.S. business.
Income received for work while an inmate in a penal institution.
Interest and dividends.
Nontaxable employee compensation (like 401(k) contributions).
Pensions and annuities.
Nontaxable scholarships or fellowship grants.
Nontaxable workfare payments. (A welfare program where participants are typically required to perform public service work.)
Social security and railroad retirement benefits.
Unemployment compensation.
Workers’ compensation.
Substitute for earned income
There is an exception for the taxpayer or spouse required to have earned income if one of them was a student or disabled.
For each month, or part of a month, the taxpayer or spouse was a student or disabled, they are considered to have at least $250 a month of earned income ($500 if there are two or more qualifying persons). Any month they are not a student or disabled, only their actual earned income, if any, is included.
