Why is this Topic Important to Wealth Managers? This topic presents discussion on the child and dependent care credit. For those wealth managers who participate fully in clients planning decisions, it is helpful to understand the implication of tax credits generally. This particular blogticle explores one such credit, the child and dependent care credit.

In addition this blogticle presents an excerpted preview of new, updated material from Advanced Markets which will be available soon (see www.advisorfx.com). Over the coming 9 months, the entire AUS service is being revised and will be rolling out monthly. The updating will include many new areas and a sharper focus with practical explanations and client presentation aides for current areas. We look forward to helping you secure your next sale.

A credit is available for certain child and dependent care expenses incurred by a taxpayer as a result of employment.[1] Eligible taxpayers are allowed a credit of up to 35% of certain expenses incurred for the care of a “qualifying individual.” [2] However, the credit is subject to several restrictions.

First, the 35% is reduced (but not below 20%) by one percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the taxable year exceeds $15,000.[3] The effect of this reduction is that for taxpayers with adjusted gross income of more than $43,000 the applicable percentage is 20%.

A second restriction further reduces the credit by limiting the amount of expenses eligible for the credit to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.[4]

A “qualifying individual” is defined as: (1) a child under age 13 for whom the taxpayer is entitled to take a dependency exemption, (2) a physically or mentally incapacitated dependent, or (3) a physically or mentally incapacitated spouse.[5]

Expenses for household and dependent care services are “employment related” if they are incurred to enable the taxpayer to be gainfully employed.[6] “Gainful employment” includes periods in which the taxpayer is employed full-time, part-time, or in active search of gainful employment.[7]

Expenses for services outside the taxpayer’s household qualify only if they are in respect to a child under age 13 or a qualifying individual who regularly spends at least eight hours each day in the taxpayer’s household.[8] However, no amount of any expenses for overnight camp will be considered “employment-related.” [9]

Payments for child or dependent care to a close relative qualify for the credit so long as: (1) neither the taxpayer nor his spouse is entitled to claim the relative as a dependent; and (2) the relative is not a child of the taxpayer who is younger than age 19 at the close of the taxable year. Taxpayers must provide the name, address and taxpayer identification number of the child care provider in order to claim the credit.[10]

The full material presented under this section will be available soon. Check back with Advanced Markets for more information. Tomorrow’s blogticle will continue to discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] IRC Sec. 21(a)(1).

[2] IRC Sec. 21(a)(2).

[3] IRC Sec. 21(a)(2).

[4] IRC Sec. 21(c).

[5] IRC Sec. 21(b)(1).

[6] IRC Section 21(b)(2).

[7] Treas. Reg. §1.21-1(c)(1).

[8] Treas. Reg. §1.21-1(e)(1).

[9] Treas. Reg. §1.21-1(d)(6).

[10] IRC Sec. 21(e)(9).

Tags: Adjusted Gross Income, Child and Dependent Care Credit, Childcare, Employment, Expense, Internet Relay Chat, Tax, Wealth

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