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Copyright 2009 CCH Incorporated, All Rights Reserved CCH 2007 Standard Federal Tax Reporter
Credits -- Secs. 21-54 Child care credit -- Sec. 21 Current Developments MISCELLANEOUS DOCUMENT
2007 Standard Federal Tax Reporter (CCH) P 48,726
P 48,726 Final Regulations Clarify Child and Dependent Care Credit and Add Safe Harbor for Short Absences
IRC CCH Explanations The IRS has issued final regulations for the child and dependent care tax credit. The final regulations generally track proposed regulations issued in 2006 with some modifications, especially clarifications of educational programs that do not qualify as employment-related expenses. The final regulations also include a safe harbor for short and temporary absences from work. 1
Background
The child and dependent care tax credit is calculated as a percentage, which can reach as high as 35 percent, of qualified employment related expenses for qualifying dependents. Expenses are employment-related only if the expenses are primarily for household services or for the care of a qualifying individual. Actual expenses are capped at $3,000 for one dependent and $6,000 for two or more dependents. Income restrictions also apply.
Comment. "Because the child and dependent care credit is non-refundable, only individuals who owe federal income taxes can take advantage of the credit," Elaine Maag, a research associate at The Urban Institute, told CCH. Approximately 6.3 million taxpayers claimed the credit in 2004, Maag noted. While $6,000 may be adequate in rural communities, it likely is not in metropolitan areas, Maag observed. Indexing the credit for inflation would help, she said.
Three categories of people may be qualifying persons for purposes of the child or dependent care credit. They are any child under the age of 13 for whom the taxpayer can claim a dependency exemption; any dependent, regardless of age, who is disabled; and a disabled spouse, regardless of age, amount of support or place of abode. To claim the credit, taxpayers must file IRS Form 2441, Child and Dependent Care Expenses, along with Form 1040, or file Schedule 2 along with Form 1040A.
Comment. If an individual's employer does not offer any type of dependent care assistance, the tax credit for child and dependent care may be his or her only chance to recover some tax benefits for dependent care expenses.
Educational Programs
The IRS received a number of comments to allow some apportionment of the expenses for all-day kindergarten. However, the IRS determined that expenses for a child in kindergarten or a higher grade are not for care and are not employment-related expenses. Additionally, summer school and tutoring programs are not for care. Similarly, the cost of an overnight camp does not qualify. Expenses for before-school or after-school care of a child in kindergarten or a higher grade may be for care.
Gainful Employment
Expenses are employment-related only if they enable the individual to be gainfully employed. The expenses must be for periods when the individual is employed or is seeking employment. Determining if an expense is for gainful employment depends on the facts and circumstances, the IRS reiterated.
Comment. Part-time employees generally must allocate expenses for dependent care between days worked and days not worked.
Safe Harbor
Back references: P 3507.03 and P 3507.04.
Under the proposed regulations, the cost of care had to be allocated on a daily basis if expenses are paid for a time only part of which the taxpayer is employed. The proposed regulations provided an exception to the allocation requirement for a short and temporary absence from work, such as a vacation or hospital stay. The final regulations include a safe harbor that treats an absence of no more than two consecutive calendar weeks as a short, temporary absence.
FOOTNOTES: n1 T.D.9454, August 13, 2007.
UPDATE-DATE: January 28, 2009
