Peter G. Robbins, CPA, The Daily Record Newswire
Q: My wife and I received an early Christmas present; our daughter (our first) was born in early December. My wife is planning on returning to work only on a part-time basis in a few months. Isn’t there a tax break for paying a person or a day care to watch over our daughter while we are working?
A: Congratulations on the birth of your child! In addition to a $3,900 dependent deduction for 2013, there is a Child and Dependent Care Credit that you can take advantage of when you begin paying child care costs in 2014, provided you meet all the tests. This credit can help offset some of the costs of the child care and is available for all “qualifying persons” as discussed below.
The credit is claimed by completing and attaching Form 2441 to your tax return or including it with your e-filed return. The tax credit (a direct offset to your federal income tax) starts at 35 percent of your qualifying costs for care. The costs are capped at $3,000 for one qualifying individual or $6,000 for two or more, and if your employer provides a dependent care benefit you will need to first offset your expenses with this benefit. Doing the math, the maximum credit is $1,050 ($2,100 if two or more qualifying individuals). But like so many tax benefits, there is a reduction in the credit percentage as your adjusted gross income increases. The credit is reduced in increments for AGI of more than $15,000, but the reduction is capped at AGI of $43,000. At AGI of $43,000 or more, the credit is 20 percent of your qualified expenses.
In completing Form 2441, you will need to identify the care provider’s name, address, Social Security number or employer identification number, and the amount paid. You may also need to give the provider a Form W-2 if the day care provider is an employee in your home, or possibly a Form 1099 to report the amounts paid. You will also need to report your child’s name, Social Security number and amount of qualifying expenses paid for care.
“Qualified expenses” include amounts paid for household and caregiving services while you worked or looked for work. Further, if you are married and filing a joint tax return, you must both be working (or looking for work) and have earned income. Finally, the payments for care cannot go to your spouse, the parent of your qualifying person, or to anyone you can claim as a dependent on your return. Also, payments cannot go to your child who is younger than 19, even if the child is not your dependent.
So congratulations again, and be sure to take advantage of this valuable credit. And while you are at it, start saving for college and the wedding!
Q: My dad left some money to our young child, and consequently he will have interest and dividend income reported under his Social Security number. Will we need to file a tax return for him? He’s only 5!
A: Depending on the amount of income generated, you will either need to file a return for your son or report the income on your tax return. Investment income includes interest, dividends and capital gains, whether directly from the child’s investments or reported to the child via a trust. To add further insult to injury, if that investment income exceeds $2,000, the parent’s tax rate may apply to all or part of the income instead of the child’s tax rate.
If your son’s total interest and dividend income is less than $10,000, you can use Form 8814 and report the income on your tax return. Doing so will mean that your son does not need to file a return of his own.
If your son’s investment income is $10,000 or more, or if he has capital gain income (other than capital gain distributions from mutual funds), he will need to file his own tax return and include Form 8615. This form is used to apply the parent’s tax rate to his investment income of more than $2,000.
Your child may only be 5, but the IRS does not discriminate in taxing based on age!
