ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, March 18, 1996 TAG: 9603200091
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: changes in the tax law
DATELINE: WASHINGTON
SOURCE: DAVE SKIDMORE Associated Press
At tax time, children become more than blessings. They represent federal tax breaks. Beyond the usual exemption for dependents, two breaks are available to working families who pay someone to care for their children.
One, offered through employers, can shelter as much as $5,000 from income, Social Security and Medicare taxes. The other is a credit taken on your tax return.
If you received dependent-care benefits from your employer or want to claim the credit, use Schedule 2 with the short Form 1040A or Form 2441 with the long Form 1040. IRS Publication 503 explains the rules.
Both breaks are for children younger than 13 and for your spouse and for other dependents, such as elderly parents, who are unable to take care of themselves because of physical or mental disability.
To claim these tax benefits, both you and your spouse must work. Or, if only one spouse works, then the other must have been a full-time student during at least five months of the year or could not take care of himself or herself.
Qualifying child-care expenses include payments to sitters working in your home, payments to nursery schools and day-care centers, payments for after-school care programs, and payments to someone who cares for your child in his or her home. Educational expenses, such as private-school tuition for first grade and above, don't count.
If you're divorced or separated, the custodial parent gets to claim the credit. If there's joint custody, the credit goes to the parent with whom the child spends the most time.
You must report the name, address and Social Security number of your dependent-care provider, or, in the case of a school or center, the taxpayer-identification number.
nEmployer-provided care: This break's value depends on your tax bracket. If you're in the 15 percent bracket, it can save you as much as $1,132.50 in income and payroll taxes; in the 28 percent bracket, as much as $1,782.50.
Your employer can offer up to $5,000 in tax-free care, such as an on-site day-care center. The aid can also take the form of a ``flexible spending arrangement'' or a ``salary reduction plan.''
Generally, an amount you choose at the beginning of the year, up to $5,000, will be deducted from your salary, before taxes, and ``paid'' to you as you submit child-care receipts.
But be careful how much you choose to have put into a dependent-care account. You forfeit anything left over at the end of the year. If you have $5,000 deducted from your salary but have only $4,000 worth of expenses, you lose $1,000.
Child-care credit: For families with two or more children, it's worth up to $1,440, depending on income and other variables. For families with one child, it's worth a maximum of $720.
In figuring the credit, you may consider up to $2,400 of dependent-care expenses with one dependent, and up to $4,800 with two or more. Those figures must be reduced by any employer-provided service, such as an on-site day care, you received.
The maximum credit is 30 percent of expenses. As adjusted gross income rises above $10,000, that declines gradually. For families above $28,000, the maximum is 20 percent.
Nanny Tax: If you directly employ your care provider and his annual wages were $1,000 or more, you must withhold Social Security and Medicare taxes (7.65 percent) from the provider's wages. And, as an employer, you must match that amount and send both amounts to the IRS.
Under a new simplified procedure, you report this ``nanny'' tax directly on line 53 of your Form 1040. Attach a Schedule H.
As an employer, you'll need an employer identification number. File Form SS-4 to get one.
You also may have to pay the federal unemployment tax and withhold income taxes from your provider's wages. See Publication 926 for more information. And you should contact a state tax office to see if you are subject to state withholding tax and state unemployment tax.
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