Care Credit

One of the unfortunate fallouts of the financial crisis: Some cash-strapped parents have been forced to give their baby sitter a pay cut. In fact, 36% of baby sitters surveyed by SitterCity reported getting paid less than they were a year ago. Luckily, the federal government offers two tax breaks that can help defray some of these costs: the child care credit and dependent care accounts. If you pay for day care, preschool, or a nanny, it pays to learn about these two tax breaks -- they could save you several thousand dollars.

Taxpayers with annual adjusted gross income under $15,000 can claim 35% of their allowable expenses as a credit. Above $15,000 of adjusted gross income, the percentage of allowable expenses that can be claimed as a credit phases down to 20% (decreasing by 1% for every $2,000 of income). Taxpayers with an adjusted gross income of $15,000 or less use the highest applicable percentage of 35%. For taxpayers with an adjusted gross income over $15,000, the credit is reduced by one percentage point for each $2,000 of adjusted gross income (or fraction thereof) over $15,000. Tax filers can use the credit to offset their federal tax liability or receive it as a refund, if they owe little or no federal income tax. The EITC is available in 2008 to married couples earning less than $41,646 or singles earning less than $38,646, and provides a maximum benefit of $4,824 for families with two or more children.

Free copies of these forms can be obtained at www.irs.gov/formspubs or by calling the IRS at 1-800-TAX-FORM. Families must have dependent children under age 17 to get it. Millions of families became eligible last year even if they owed no taxes. Families whose income is so low that they owe no tax receive no credit at all. This means that families can receive the full value of the credit for which they qualify regardless of whether they owe taxes.

Expenses of attending a daytime summer camp qualify for the child and dependent care credit if that is a reasonable means of providing care during working hours. However, overnight camp expenses do not qualify for the child and dependent care credit. Expenses, however, only qualified if the child was under age 13 (rather than 15 before 1989). In addition, eligible expenses were reduced, dollar for dollar, by the amount of expenses excludable from the taxpayer’s income under the dependent care exclusion.

Depending on your income, you may also be able to claim credit if you paid for care for at least one child who was under 4 at the end of the year. The maximum credit is 75% of the State credit. Depending on your income, the credit can reach up to 35 percent of your expenses. Thus, the potential maximum credit you can claim for 2008 is only $1,050 (35 percent of $3,000) for the care of one qualifying child, and $2,100 for the care of two children under the age of 13.

Children of any age can qualify if they have a disability. Children must be under 19 and living with you in order to qualify for this credit.

Let’s say in 2007 you contribute $5,000 to a dependent care account for your child. You spend $8,000 on child care that year.
A Consumer Reports investigative story in July on medical debt found that risky credit and financing lines are rampant. Some medical credit lines reach $40,000 with retroactive interest rates of up to 27.99 percent if a patient misses a payment or doesn’t pay it off in time. For many Americans, finding a caregiver is a complicated and increasingly expensive task. Fortunately, the IRS has recognized this, and offers a credit to some working taxpayers who pay for child care services.

You cannot claim more than the amount you made in the last year. If you are married, you cannot claim more than the amount the lowest earning spouse earned. If the individual reaches age 13 before the end of the tax year, the taxpayer may receive credit for expenses incurred up to the dependent’s birthday. In the case of divorce or separation, only the custodial parent (that is, the parent with custody for the greater portion of the year) can claim the credit even if the non custodial parent provides more than 50% of the child’s support or the custodial parent releases the right to claim a dependency exemption for the child. The cost of raising a child is elevating every day. Paying for baseball leagues, dance lessons, day care, clothing, food and school supplies can add up to be a large sum of money.

Because of the rising cost of living, the grand majority of modern families have two working parents who earn two separate incomes. Due to this situation, children are often taken care of during the day by someone other than their parents.

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Gurmit loves travelling; he has been over 70 countries. He speaks fluent Cantonese, Polish, Hindi, Punjabi and English. Gurmit is an author, writer, insurance and mortgage expert. He frequently writes on various topics of interest to his readers. Gurmit Singh is a licensed mortgage expert with Dominion Lending Centres Mortgage Villa.

Gurmit Singh, mba
Mortgage Expert
M08009905
Dominion Lending Centres Mortgage Villa (11574)
Email:gurmit@gurmitsingh.ca
Website: http://www.gurmitsingh.ca