Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 24, 1992 TAG: 9202220087
SECTION: BUSINESS PAGE: A7 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
CREDIT FOR CHILD CARE AVAILABLE
A federal tax saving of up to $1,440 a year is available to families who must pay for child care so they can work.Taxpayers who qualify may claim a credit for part of their child-care expenditures or take advantage of employer-provided assistance whose value is not subject to tax. Any employer-paid benefit claimed reduces the amount of expenses eligible for the credit.
The same benefits are offered for those who must care for a parent or other dependent.
If you are eligible for either benefit, you may have to calculate both to see which is more advantageous.
The benefits are claimed on Form 2441 if you file the long Form 1040, or on Schedule 2 if you file Form 1040A. Publication 503, available free from the Internal Revenue Service, gives a complete rundown on how to calculate these benefits. Here are the basics:
Taxpayers may accept tax-free up to $5,000 a year worth of dependent-care services provided by an employer. It must be offered in a written plan that does not discriminate against lower-paid workers.
The $5,000 can include benefits that workers pay for in a "flexible spending arrangement" or "salary-reduction plan."
Under such a plan, an employer withholds prearranged amounts from paychecks and the money is set aside to reimburse the worker for dependent-care expenses. Those dollars escape Social Security and income taxes. But any money not spent from that account by year end is lost.
Taxpayers may be able to take a tax credit of up to $720 for one dependent or up to $1,440 for two or more. The credit is calculated on a maximum of $2,400 of eligible expenses for one child or $4,800 for two or more. The maximum credit is 30 percent and drops gradually as income rises, to a minimum of 20 percent for those with adjusted gross income over $28,000.
Any assistance paid by an employer or under your salary-reduction plan must be subtracted from eligible expenses before the credit is calculated.
Here is how the credit works:
You may be eligible if, to work or seek work, you have to hire someone to care for a dependent child who is disabled or under age 13; any other dependent, such as an elderly parent, or a spouse who is not capable of self-care. You must have furnished over half the cost of maintaining a home for the dependent last year.
You and your spouse must have had earnings in 1991. This requirement is met if one spouse was a full-time student during a part of each of five months during the year and the other spouse worked.
You may include services of a housekeeper, maid or cook but not a gardener or driver. You may include expenses of nursery school or day care outside the home for a child under 13, but only the portion that pays for care - not education.
The total of expenses used to calculate the credit may not exceed your earned income - wages, tips and the like - for the year. If you are married, these expenses must be no more than the income of the spouse with the lower earnings.
The credit may not be claimed for dependent-care payments to your child under the age of 19 or to any person who can be claimed as a dependent by you or your spouse.
There is a tax downside of dependent care, however.
Hiring someone to care for your dependent makes you an employer. As a rule, if you paid any household employee wages of $50 or more in any quarter, you must withhold Social Security and Medicare taxes.
Too, if you paid $1,000 or more in wages during a quarter, you are liable for an unemployment-benefits tax of 6.2 percent of the worker's first $7,000 of cash wages.
IRS Publication 926 tells all you need to know about employer taxes.