A taxpayer came to me today for verification on dependent care expenses. Their basic profile may be similar to yours. A husband and wife with two children in day care. The wife is a full time student that does not work outside of the house. The husband was laid off from his former job and has been regularly seeking gainful employment throughout the duration of the tax year in question.

These good people were told by a cog in a tax preparation franchise that they did not qualify for dependent care expenses because neither had employment income.  Of course I got pissed off because I’m just so sick and tired of tax practitioner ineptitude and deceit that I felt compelled to throw down this post at the end of a long day which is basically a brief overview of IRS Publication 503, Child and Dependent Care Expenses reported on IRS Form 2441.

This can be a hard topic to understand. Here’s the basic deal on dependent care – expenses paid while either working, seeking employment or attending school are qualified dependent care expenses under IRC [§21(e)(7); Reg. §1.21-1(a)(3)]. As long as the husband/wife file a joint return, the expenses paid while the wife attends school full-time for at least five months of the year and the expenses paid while the husband actively seeks employment are qualifying dependent care expenses.

A taxpayer who is a student is deemed to have earned $250 per month thus meeting the earned income requirement of §21. This is what tripped up the neophyte tax practitioner.

Regarding the Child and Dependent Care Tax Credit, according to IRS Tax Topic 602 this tax credit is “generally a percentage of the amount of work-related child and dependent care expenses you paid to a care provider. The percentage depends on your adjusted gross income. Work-related child and dependent care expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work for any period when you had one or more qualifying individuals. Expenses are paid for the care of a qualifying individual if the primary function is to assure the individual’s well being and protection.”

Three points that tend to trip taxpayers up are:

1. In general. amounts paid for services outside your household qualify for the credit if the care was provided for a qualifying individual who (i) was your qualifying child under age 13 or (ii) regularly spent at least 8 hours each day in your household.

2. The expenses qualifying for the credit must be reduced by the amount of any dependent care benefits provided by your employer that you excluded from gross income.

3. The total expenses qualifying for the credit are capped at $3,000 (if you had one qualifying individual) or at $6,000 (if you had two or more qualifying individuals), and may not exceed the lesser of your and your spouses earned incomes.

A qualifying individual is:

1. Your dependent who was under age 13 when the care was provided and was your qualifying child

2. Your dependent who was physically or mentally incapable of self-care and who had the same principal place of abode as you for more than half of the year, or

3. An individual who was physically or mentally incapable of self-care, had the same principal place of abode as you for more than half of the year, and was your dependent. For this purpose, whether the individual was your dependent is determined without regard to the individual’s gross income, whether the individual filed a joint return with the individual’s spouse, or whether you or your spouse could be claimed as a dependent on someone else’s return.