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Bread Winners and the Child and Dependent Care Credit

Updated on March 21, 2015

Doughnut$

The Child and Dependent Care Credit helps bread winners make the doughnuts and still provide custodial care for family.
The Child and Dependent Care Credit helps bread winners make the doughnuts and still provide custodial care for family. | Source

The Child and Dependent Care Credit (C.D.C.C.) is a provision of the tax code that helps bread winner taxpayers in their efforts to insure custodial care of family while they go out and make the doughnuts. It does this by giving taxpayers a credit that allows them to calculate up to $3,000 (one qualifying individual) or up to $6000 ( two or more qualifying individuals) of expenses in figuring out the amount of their credit.

Taxpayers’ ability to receive the Child and Dependent Care Credit depends upon the payments and people involved. Taxpayers who earn qualifying income and pay qualifying expenses to the qualifying care providers of their qualifying persons are eligible to qualify for its benefits. It is quite the quantity of qualifying needed for the bread winner taxpayers to benefit from the C.D.C.C.

PAYMENTS

Qualifying Income- Payments to Taxpayers

To qualify for the Child and Dependent Care Credit taxpayers must receive earned income. Taxpayers who actively provide services in exchange for payment are considered to have earned income. The C.D.C.C. defines earned income by the way it is typically described within the tax rules[1] and the meaning that is unique to this provision of the tax code.

-Typical Earned Income

Wages

Tips

Salaries

Net earnings from self-employment

Taxable employee compensation (most fringe benefits)[2]

Strike benefits

Disability Reported as Wages

-Atypical Child & Dependent Care Definition of Earned Income

Taxpayer who was a full time student during any month expenses were paid out for care received by qualifying person is considered to have earned income for that period of time.

Taxpayer who was physically or mentally unable to care for his or her needs is credited with meeting the earned income standard.


Qualifying Expenses- Taxpayers’ payments to care providers

A qualified expense is a payment to someone(s) who’s custodial care of a qualifying person allows the taxpayer(s) to work or look for work. Expenses paid out for care of a qualifying person that does not fit within this tight window referred to previously are not qualified expenses for the purposes of the Child and Dependent Care Credit. The whole point of the C.D.C.C. is to encourage bread winners in their endeavor to make dough.[3]


[1] Earned Income is generally referred to as income generated from work, services actively performed in the tax year. The Earned income Credit guidelines define it in the more typical manner. See publication 596 The I.R.A. deduction guidelines refer to earned income as compensation. See publication 590-A Neither includes the Child and Dependent Care’s atypical aspects in their definition of income.

[2] Most fringe benefits are taxable. See Publication 525 Taxable and Non Taxable Income

[3]See work related expense test. References Publication 503 and Publication 17 Part 6 Chapter 32 provide examples of both covered and uncovered expenses.

Sample 2441 Care Providers

Source

PEOPLE

Qualifying Care Providers

Generally, care providers who qualify the taxpayer(s) to benefit from the Child and Dependent Care Credit are those who are paid qualified expenses for the care of the taxpayer(s) qualifying person(s). However, four types of care providers cannot qualify the taxpayer for expenses paid to them:

1) All care providers who can be claimed as dependents by the taxpayer(s).

2) The care providers who are the parents of the taxpayer(s) qualifying persons who are under the age of 13 at the time care was received.

3) The care providers who are the taxpayer(s) sons or daughters and younger than 19 at the end of the tax year regardless of their dependent status.

4) Anyone who has been the taxpayer(s) spouse at any pint during the tax year.

Bread Winner Child & Dependent Care Credit References

Form 1040/1040A
Form
Publications
1040 Line 49
2441
Publication 503 Child and Dependent Care Expenses
1040A Line 31
 
Publication 17 Part 6 Chapter 32
 
 
 

Qualifying Persons

The qualifying person receives the care that enables the taxpayer(s) to acquire benefits bestowed by the Child and Dependent Care Credit. This is a selective class. It includes only those who are younger than 13, or physically and mentally unable to care for themselves and who lived with taxpayer(s) more than half of the tax year.[4] As such, the only people who ‘qualify’ for this distinction are as follows:

1) A qualifying child who is the taxpayer(s) dependent and under the age of 13 when the care was received, or was physically or mentally unable to care for himself/herself regardless of age. Divorce provides an exception to the requirement of a qualifying child being the taxpayer’s dependent. (see references for details)

2) The taxpayer’s dependents who meet the general requirements regardless of age.

3) The bread winner- taxpayer spouse who lived with taxpayer for more than half the year and who was physically and mentally unable to care for himself/herself while the care was received.[5]

4) Qualifying persons are also those who meet the general requirements but are not classified as dependents for tax purposes due to selected limited reasons.[6]

[4] Physically and mentally unable refers to “Persons who cannot dress, clean, or feed themselves because of physical or mental problems…” or “Persons who must have constant attention to prevent them from injuring themselves or others. The C.D.C.C. more narrowly defines “disability” than Social Security which base the definition on inability to work.

[5] Married taxpayers are looked upon as co taxpayers. A spouse is never considered a dependent even if one spouse has no income. In short ,they are seen as co bread winners.

[6] The exceptions to dependent status are listed in publication 503 reference.

Cash Machine

Chi ching!
Chi ching! | Source

PRODUCT

Unlimited, Limited and Imitated

The Child and Dependent Care Credit has the rare feature among bread winner friendly tax benefits of not imposing any income limits upon its recipients. Whereas, the C.D.C.C. doesn’t put a ceiling on eligible taxpayer incomes, it does gradually reduce the percentage amount of expenses eligible for the credit as taxpayer incomes increase.[7] Its unique provisions have saved taxpayers over $6 billion in taxes for the years 2012-2013.[8]

Imitation of a federal statute is the sincerest form of flattery expressed by a state law. The C.D.C.C. was introduced into tax law by the Tax Reform Act of 1976.[9] The state of New York adopted a similar provision in 1977.[10] New York has since expanded upon its version of the Child and Dependent Care Credit by making it a refundable credit for most residents.[11] Also, 26 additional states and the District of Columbia have included similar provisions in their tax codes. Apparently, what’s good for the federal goose is good for the states’ ganders.

[7] See references Publication 503 and Publication 17

[8] Congressional Joint Committee on Taxation, ctj.gov- Estimates of Federal Tax Expenditures 2012-2017

[9] P.L. 94-455, www.taxpolicycenter.org/taxtopics/encyclopedia

[10] New York Department of Taxation and Finance

[11] www.tax.ny.gov


Sample 2441 Qualifying Persons

Source

Taxtionary

Adjusted Gross Income- The taxpayer(s) income after adjustments from Gross Income.

Credit- A dollar for dollar reduction of the taxpayer(s) Tax Liability.

Deduction- A subtraction attributed to the taxpayer’s income that effectively reduces the $ amount of income that is subject to being taxed.

Dependent- An individual the taxpayer(s) can use as an exemption who meets requirements specific to their relationship to said taxpayer(s).

Exemption- An individual a taxpayer can claim to reduce their tax liability. The person can be the taxpayer, spouse or a dependent of the taxpayer(s). The Exemption amount ($3950) is the actual reduction in dollars received for the person.

Non-Refundable Credit- A credit that reduce Tax Liability and simply allows the taxpayer(s) to benefit to the amount of Tax Liability.

Qualifying Child- An individual who meets the requirements of five test used to determine who qualifies for that distinction.

Qualifying Relative- An individual who meets the requirements of four test used to determine who qualifies for that distinction.

Tax Liability-The amount of taxes for which the taxpayer(s) is liable.

Tax Year- The year for which the taxpayer(s) taxes are filed.

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    • justthemessenger profile imageAUTHOR

      James C Moore 

      3 years ago from The Great Midwest

      billybuc- It's that time of year again when we spend quality time with our Uncle Sam. Gladcto hear from you.

    • billybuc profile image

      Bill Holland 

      3 years ago from Olympia, WA

      I'll check this out. Thanks for the information. This is the nudge I needed to finally get those taxes done.

    • justthemessenger profile imageAUTHOR

      James C Moore 

      3 years ago from The Great Midwest

      FlourishAnyway - Thanks for visiting. I like to point out the tax breaks that are out there.

    • FlourishAnyway profile image

      FlourishAnyway 

      3 years ago from USA

      This detailed information should be helpful, especially as tax day draws ever closer. Thanks for the explanation.

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