child care credit question

The limit is $3000 per child for whom you incurred child care expense. If you incurred expense of any amount for each of two children, the allowable limit is $6000. So... you have broken the code. Pay your mother some amount that she has to declare as taxable income and you get to use up to $6000 as qualified expense. As your mother would not like to pay self-employment tax, keep the payment under $433.

-- Alan

I would be interested in a cite that states that you must incur any expenses for the second qualifying child in order to claim the larger amount. I haven't looked in a couple of years, but when last I did, the statute applies the limit based on the number of qualifying children of the TP, and paying expenses for the child was not a requirement for qualification. It might have been changed, but I have felt the instructions for the 2441 have been incorrect for years.

-- Bruce E. Cobern, CPA mailto: snipped-for-privacy@pipeline.com

That was my impression too when reading 2441. On line 39, it says "Enter $3000 ($6000 if two or more qualifying persons)". It didn't say "...two or more qualifying persons for whom you incurred child care expenses". If I were just filling out 2441 myself, I would definitely enter $6000, as to the best of my knowledge the definition of "qualifying person" has nothing to do with paying for care. However, I am doing this in TurboTax, which wouldn't let me use the $6000 figure; actually it wouldn't let me enter 0 in line 2, column (c) (qualified expenses) for one of my kids -- I have to leave it blank, effectively disqualifying the child. [This may be off topic: Now that I think about it, the error message it gives goes "Qual child/dep care exps-2 should be blank since you do not have dependent care provided by your employer", which sounds a bit strange -- does it mean I could enter 0 as qualified expenses if my company provided the care (for free presumably)? Or it means something else? Just curious.]

There are two parts in the equation. One is too have a qualifying individual and the other is to incur an employment related expense for that individual. The second part is IRC Sec. 25(b)(2) where it defines a qualifying expense. It's an amount paid for the care of a qualifying individual. If you incur an expense for a qualifying individual your limit is $3000. If you incur an expense for another individual it is $6000. The code doesn't specify how much the expense has to be, only that you must incur that expense for the individual. The dollar limit is in 25(c).

One may find the whole section ambiguous, but it is not ambiguous to the software vendors, as you can't get the $6000 limit unless you have an expense listed for two children.

2) Employment-related expenses (A) In general The term ''employment-related expenses'' means amounts paid for the following expenses, but only if such expenses are incurred to enable the taxpayer to be gainfully employed for any period for which there are 1 or more qualifying individuals with respect to the taxpayer: (i) expenses for household services, and (ii) expenses for the care of a qualifying individual. Such term shall not include any amount paid for services outside the taxpayer's household at a camp where the qualifying individual stays overnight.

-- Alan

"A.G. Kalman" wrote:

But there is NOTHING in the code that says that expenses must be incurred for EACH qualifying individual. The definition of a QI is in Sec. 21(b)(1) and says: "(1) Qualifying individual The term "qualifying individual" means? (A) a dependent of the taxpayer (as defined in section 152 (a)(1)) who has not attained age 13,"

(other possible definitions omitted as not relevant)

Note that there is nothing here that specifies that any expenses need be incurred for the individual. So, as long as there are at least two dependent children under 13, the TP has two or more QI's. The limit definition is in Sec. 21(c) and reads:

"(c) Dollar limit on amount creditable The amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed: (1) $3,000 if there is 1 qualifying individual with respect to the taxpayer for such taxable year, or (2) $6,000 if there are 2 or more qualifying individuals with respect to the taxpayer for such taxable year." Note, again, that this limit definition has NO reference to whether expenses were incurred for each individual, only that there BE 2 or more qualifying individuals with respect to the taxpayer. I know what the instructions for the 2441 say, and how the software companies are interpreting this (I'm sure because that is how the IRS instructions read), but I don't think the section is ambiguous at all, and I don't believe that you need incur expenses FOR two or more children to use the $6,000 limit, only that you HAVE two QI's and incure at least $6,000 of employment related expenses. I was just wondering whether the statute had changed to support the IRS position, but, apparently it has not. So, I still hold that my position above is the one that actually reflects the law, and that taxpayers should not be slaves to their software and should override it when they believe, as I do in this case, that the software does not properly represent the law. (After all, we all know that the instructions are not authoritative.)

-- Bruce E. Cobern, CPA mailto: snipped-for-privacy@pipeline.com

Please let us know what happens when you file a tax return that has an expense for one child in excess of $3000 and you don't have a second child with any expense and you try to use the whole amount for the credit.

-- Alan