Positively Family Friendly Tax Provisions
There is a lot that working Moms and Dads need to know about getting Uncle Sam to help with child care. Time to learn about the Child Tax Credit, the Child Care Tax Credit, & Dependent Care FSAs! They may sound alike, but they are all different, with different rules and eligibility requirements.
The Child Tax Credit lets you reduce your federal income tax bill by up to $2,000 for each qualifying child under the age of 17 that you claim, and this is new: $500 per qualifying dependent in 2018. The child tax credit is just that – a tax credit. It’s better than a deduction because it directly reduces the amount you owe the IRS.
Under the Tax Cuts and Jobs Act, the child tax credit increased from $1,000 to $2,000 for tax year 2018. And there is additional good news – more families will be able to claim it because income thresholds increased.
Now thanks to the TCJA up to $1,400 of the Child Tax Credit is refundable. So if your tax bill when you file in 2019 is zero, you may get a $1,400 refund for every eligible child (indexed for inflation in the upcoming years). However, the new tax law caps the refundable portion of the child tax credit to 15% of your earned income that exceeds $4,500. However the $500 for a dependent other than a child is non-refundable.
Sound too good to be true? Here are the IRS requirements for eligibility including income:
1. The child claimed as your dependent must have been under age 17 at the end of the tax year,
2. The child can be your daughter, son, grandchild, a descendant of one of your siblings, a foster child or adopted child,
3. You must have provided more than half of the money for their living expenses,
4. The child must be claimed as your dependent on your federal income tax return,
5. The child must be a U.S. citizen, a U.S. national or a U.S. resident alien, and
6. The child must have lived with you for more than half of the tax year (with a few exceptions).
Income is also an eligibility factor. For tax year 2018, the phase-out begins at $200,000 modified AGI for those filing single head of household, or married filing separately (the previous phase-out started at $75,000). Married filing jointly: $400,000. Tax Reform raised these phase-out thresholds dramatically, effectively giving more families the opportunity to claim the Child Tax Credit. Your income can reach a point where you can’t claim the Child Tax Credit though. The credit vanishes for single, head of household, married filing separately at $240,000, and for married filing jointly at $440,000.
The Child and Dependent Care Credit provides a welcome tax break for many working parents too! Remember the Child Tax Credit and the Child Care Tax Credit are two different things. The Child Tax Credit can be claimed by the parents or guardians of minor children. On the other hand, the Child and Dependent Care Tax Credit is used by those parents or guardians in the workforce that pay others to care for children, aging parents or disabled relatives.
If you are working and responsible for the cost of childcare, you qualify for the credit whether you pay for care in your home or at a daycare facility. If you were a full-time student or unemployed for part of the year, you may also qualify as long as you were actively looking for work. Whether you are single and have no one to stay at home and babysit, or you and your spouse both work, you’ll qualify for the tax credit.
Remember tax credits are more valuable than tax deductions! Tax credits reduce your tax bill dollar for dollar, so the tax savings add up quickly. You can take the Child and Dependent Care Credit for 20% to 35% of child care costs, up to $3,000 for one child, or $6,000 for two or more children, depending on your income level. In this case, if the amount owed in taxes is less than your credit, you can only zero out your bill.
Here’s the general rules for eligibility:
1. A dependent child must be 12 or younger at the time the child care is provided,
2. Spouses and other dependents must be physically or mentally incapable of self-care and lived with you for more than half the year,
3. If you’re married, you must file as married filing jointly,
4. You must have earned income from a job, not investment or dividend income, and
5. You must provide the care provider’s name, address and Taxpayer
Identification Number — either a Social Security number or an Employer Identification Number.
You can’t claim the credit for payments to care providers who are a spouse, a co-parent or another dependent listed on your tax return, or your child who is age 18 or younger, even if they’re not listed as a dependent on your return! The cost of a cook, housekeeper, maid, or cleaning person who provides care for your child may be a qualified expense.
The Child and Dependent Care Tax Credit also applies to summer day camp while school is out! Looking ahead, you may want to read our prior article on Summer Camp Tax Breaks here: https://fuoco.cpa/wp-admin/post.php?post=1728&action=edit
Dependent Care Flexible Spending Accounts (FSAs) can be of great value to people who rely on child care to be able to work. These accounts allow working individuals with earned income to pay for qualified child and dependent care expenses while lowering their taxable income.
Dependent Care FSAs are set up through your workplace. Employers withhold a specified amount from your paychecks each pay period and deposit the money in an account. You pay child care costs out-of-pocket and then apply for reimbursement. The 2018 limit remains at $5,000 for married couples filing jointly, unmarried couples, and single individuals; and $2,500 if you are married and filing separately. It is projected to be the same in 2019. The money you contribute to a Dependent Care FSA is pretax (not subject to payroll taxes), thus reducing the amount of income subject to taxes. So you end up paying less in taxes and taking home more of your paycheck. For someone in the 28% federal tax bracket, this income reduction means saving $280 in federal taxes for every $1,000 spent on dependent care with a
Dependent Care FSA.
Once you have paid for expenses that qualify for reimbursement from the Dependent Care FSA you will need to complete a claim form provided by your employer and attach receipts or proof of payment with the form. The receipts must include specific information to prove that the payment was for qualified expenses. Specifically, the receipt should show:
• Date of the expense incurred,
• The expense amount,
• Full name, address and social security number (SSN) or tax identification of the person who provided the care.
The money in your FSA can only be used for expenses for a dependent who is 13 or younger, a spouse or other dependent claimed who is unable to work and care themselves. If you and your spouse are divorced, only the parent who has custody of the child(ren) can use FSA funds for child care.
Expenses that qualify for Dependent Care FSA reimbursement are:
• Physical care,
• In-home care or institutional-setting care, child or adult daycare services, nanny or qualified caregivers,
• Before- and after-school care,
• Summer day camps (not overnight camps),
• Transportation provided by a caregiver,
• Application fees, deposits, etc. required for obtaining care, but only if care is subsequently provided,
• Care for your spouse or a relative who is physically or mentally incapable of self-care and lives in your home.
Expenses that do not qualify as FSA-approved and therefore are ineligible include education, summer school or tutoring, babysitting by minors or other individuals claimed as a dependent, art/music or sports lessons, meals, custodial nursing care or long-term care for parents not living with you.
FSAs operate with a “use it or lose it” policy, meaning that you must use all of the money you deposited into the account for qualified expenses by the end of the plan year or you will lose your money. You will need to report your FSA contributions on your federal tax return.
CONTACT US: Your Fuoco Group professional can help you with the necessary forms and eligibility requirements for any of these programs. Let us help you identify other tax credits, deductions, and benefits you might be eligible for. Creating a financial plan with our consultants can be key to ensuring you’re taking advantage of every opportunity to save come tax season. Whether in New York or Florida, call toll free 855-534-2727, and speak to one of our tax specialists about your situation today.
