As is the case with anything tax-related, you’ll have to meet the requirements; and once those requirements are satisfied, you’ll be able to receive an additional tax break for your efforts that was designed to help offset the costs associated with caring for a parent.

Support Means Support

To meet the support requirements necessary to claim your parent as a dependent on your tax return, you must cover more than half of your parent’s support costs – meaning 51% or more of their support costs must be covered by you.

These costs include food, housing or lodging expenses, clothing, and medical services and/or equipment costs.

If support for your parent was given by a group of individuals or family members, you may want to sign a Multiple Support Declaration form which would allow a single person in the group to claim your parent as a dependent, thus giving the tax break to a single person.

Residency and Relationship

The technical term that the IRS uses to meet the relationship requirement for these tax and life situations is “Qualifying Relative”. This means that the person you’re caring for can be your parent, an in-law, or even a grandparent.

However, they must be related to you biologically, by adoption, or through marriage (which would technically be a biological relationship through your spouse).

And guess what?  The IRS has residency requirements as well. To meet the resident requirement, the person you are caring for must meet one of the following:

• Be a legal US Citizen
• Be a US National
• Be a US Resident Alien
• Be a Resident of Canada or Mexico

For foreign, non-US-citizen parents to achieve official US resident status, they must be a recipient of a Green Card issued by the US government or have lived in the US for 183 days during the past tax year.

Social Security and Gross Income

The parent you want to claim as a dependent on your tax return must have a social security number or a tax identification number. Either of these numbers will satisfy the identification requirement for the IRS.

To be allowed to claim your parent as a dependent, your parent’s earned income cannot be more than$3,800 for the 2012 tax year. This means that if your parent earns more than $3,800, you aren’t eligible to claim them as a dependent. Non-taxable income, such as Social Security, does not count toward this amount.

Also, the parent you’re claiming as a dependent cannot file a joint tax return.

More Perks and Requirements

One of the last requirements that needs to be stated is that, if you want to claim your parent as a dependent on your tax return, you yourself cannot be eligible as a dependent on someone else’s tax return. Again, you cannot be claimed as a dependent or eligible as a dependent (even without being claimed) if you plan to claim your parent as a dependent.

Once all of the requirements are met, you’ll be happy to receive an additional $3,800 tax exemption on your return.

You are also allowed to include your parent’s medical expenses when calculating your medical deductions, and you may also be able to claim the Dependent Care Credit if your parent needs assistance while you’re at work or away.

When you answer a few simple questions, TurboTax will figure out whether you are eligible to claim a relative as a dependent.  If you still have questions, you can talk to a TurboTax tax expert while you prepare your tax return.

1.  First, combat pay is not subject to Federal income tax. Combat Zones are defined by the federal government under executive order, and currently include Arabian Peninsula Areas, Kosovo area, and Afghanistan.

The lack of any family income could disqualify civilians from receiving any Earned Income Tax Credit (EITC). Even though the combat pay received isn’t taxable, it may be included as income for purposes of qualifying for the EITC. The EITC is based on income and the number of children you have, and may be as much as $5,891 for a family with three or more children. This credit is refundable meaning even if you have no tax at all for the year, you can still receive this credit.

2.  The Roth Thrift Savings Plan was introduced this year providing an excellent alternative to the standard pretax plan that had rules similar to the private sector’s 401(k). As combat pay isn’t taxed, the ability to put some of this money into a Roth designated retirement plan will provide you and your family with a tax free benefit when you retire.

3.  You may have taken a withdrawal from an IRA, 401(k), 403(b), or other qualified plan. If so, the 10% penalty for early distribution will not apply, only the tax that would normally be due for the non-taxed portion of the withdrawal.

If this is your situation, I’m happy to share with you a unique opportunity, the ability to make up this withdrawal. You have up to two years after your active duty ends and are permitted to deposit these returned funds to an IRA even if it was taken from a 401(k) or other qualified plan. This transaction is reported on form 8606. A very nice, yet little-known benefit you might use.

4.  For moving expenses to be a deduction for civilians, there are a number of requirements to meet. Not so for those on active duty. You are able to deduct the cost of moves from your home to your first post, moves from one permanent post of duty to another, and finally, for the move home within a year of your active duty coming to an end. Eligible expenses include the cost of moving household goods and travel costs for you and the members of your household. This includes your spouse and dependents.

5.  If you are selling your home, the current test to take advantage of the $250K (Single)/$500K (Married Filing Joint) exclusion of gains is that you must have lived in the house for two of the prior five years. Members of the armed forces are permitted to suspend the 5-year look-back for as many as ten years. In effect, if you qualify for the two/five rule, the time you are serving will not let the five years get behind you.

6.  Last I’d like to share that TurboTax has introduced TurboTax Military Edition. It’s free for those at a pay grade of E-1 to E-5. It will help you capture the tax credits and deductions that are offered to the men and women who have served.

Dependency exemption. In 2012, you can claim a personal exemption deduction of $3,800 for each child and other dependent, and for 2013 that increases to $3,900. Those exemptions reduce the portion of your income that is subject to federal tax. If you are in the 15% bracket this will save you $570 for 2012, and at 25%, $950 in 2012. The higher your tax bracket, the more each dependency exemption saves you.

Child Tax Credit. You may also be eligible for a tax credit, which is even better than a deduction, since it reduces your taxes dollar for dollar. The Child Tax Credit is an additional $1,000 credit you may be able to claim for children under 17. For married couples with income over $110,000 or $75,000 for a single parent, the credit phases out.

Child and Dependent Care Credit.  Child care is expensive, but Uncle Sam can help you out with the cost. If you are working or actively seeking work and you pay child care for your dependent who is under age 13, you can claim the Child and Dependent Care Credit.

This credit is a dollar for dollar reduction of your taxes, based on your child care expenses up to 35% of $3,000 for one child or $6,000 for two or more children. The credit ranges from 20 to 35 percent of your child-care expenses, depending on your income.  Nursery school, private kindergarten, after school programs and day care are all qualifying expenses.

Earned Income Tax Credit. There’s a special credit available if your wages and self-employment income fall below a certain level. How much you can earn and qualify for the credit depends on how many dependent children you have.

For 2012, if you have three or more children, you can earn up to $45,060 and qualify. With just two children, that drops to $41,952. Only one child, your earnings and adjusted gross income can’t top $36,920. The refundable tax credit you can receive ranges from a maximum of $5,891 if you have three children, to $475 if you have no children. Unlike other tax credits, the earned income credit is refundable, so if the credit is greater than the tax you owe, the IRS will send you the difference.

So next time the kids are driving you crazy, remember the tax savings and give them a big hug instead.

Don’t forget that TurboTax will help you get all of the tax credits and deductions you’re eligible for so you keep all of your hard-earned money.

Still have questions?  TurboTax walks you through the appropriate questions to help you get the dependent tax deductions you are eligible for.

Yet, in the middle of such happiness, someone (usually an uncle you only see twice a year) always seems to tell you how expensive a child will be in the 18 years that you’ll be responsible for them.

Medical Expenses

Depending on where and how you decided to have your child (hospital, birthing center, home care birthing specialists) you probably got popped with a pretty large medical expense to bring your little bundle of joy into this world.

Although paying medical bills isn’t too much fun, the good news is that you can deduct those expenses (as itemized deductions) on that year’s taxes, saving you quite a bundle.

I don’t know if it’s common practice, but my wife and I were still receiving bills from nurses and anesthesiologists when our baby was seven months old. This serves as a reminder to keep excellent records and store all of your receipts and documents in a safe place.

Your Child is Dependent on You

A new baby is totally dependent on his or her parents, but they also give mom and dad quite a nice tax break. The word on the street is that claiming a dependent (newborn or not) on your 2012 tax return will net you a $3,800 deduction. That’s $100 more than 2011 and you can claim this exemption no matter what time of year your child was born.

Your Child’s Gift to You

Not only do parents get to reap the benefits of a new dependent on their tax returns, but they also get another small gift from their little bundle of joy – the Child Tax Credit.

This year, the child tax credit remains the same at $1,000 per child. Here’s how a tax deduction and credit differ:

• a deduction reduces the overall amount of your taxable income
• while a tax credit reduces your tax bill by the actual dollar amount

This means that a $1000 Child Tax Credit reduces your tax bill by $1,000.

The Gift that Keeps on Giving – Your W4

Tax breaks on tax day are great, but don’t forget about your monthly take home pay.

When you have a child, this new person in your life also changes how you fill out your W-4 at work. Because claiming a dependent changes your tax bill, this means you may be able to now cut back a little bit on your tax withholding at your job.

Simply put, a new baby at home can upgrade your take-home pay. All you have to do is request to file an updated W-4 with your employer.

It might also be important to note that, if you’re a single parent, a new child might enable you to change your filing status from “single” to “head of household”. This simple change will increase your standard deduction.

Credit for Adoption

There are many people each year that adopt their new precious little bundle. And thanks to Uncle Sam, this scenario also comes with plenty of tax help.

In 2012, the Adoption Credit is worth $12,650 to help offset the cost of adopting a child. And for parents who adopt a child with “special needs” the IRS allows them to claim the full amount of the credit, even if the actual adoption costs were less.

No matter how you look at it, bringing a new child into your home and raising them to adulthood will cost quite a bit, but using TurboTax will help you apply all of the tax deductions, credits, and tax breaks that the government allows.

If you are a parent, having a little one (or not so little one), can give you some big tax benefits. You may already know that for 2011 you can deduct $3,700 for each dependent as an exemption on your tax return.

However there are a couple more tax credits that all parents should review to save more on your taxes.

Dependents

Child Tax Credit – $1,000

The Child Tax Credit can be a significant help with reducing your federal taxes. Depending on your income you can claim up to $1,000 per qualifying child.

What defines a qualifying child? There are a few criteria that have to be met:

• Relationship: To claim this credit, biological children, adopted children, step-children, and foster children qualify. Other family members may also qualify.
• Age: Your child(ren) has to be age 16 or younger at the end of 2011.
• Support: Your child must not have provided over half of their own support.
• Residence:  Your child must have lived with you over half of the year.
• Dependent: You have to claim your child as a dependent on your federal taxes.
• Citizenship: Qualifying children include U.S. citizen, U.S. national, and U.S. resident alien.

If you’re using tax software like TurboTax then these factors will be checked as you file your taxes to make sure you get the credit if you qualify.

But the Child Tax Credit isn’t the only tax break you should look at. The Child and Dependent Care Tax Credit can also be a big win for you.

The Child and Dependent Care Tax Credit

If you paid for child care last year, then you may qualify for a tax credit based on your dependent care expenses up to $3,000 for one dependent and up to $6,000 if you are claiming two or more.

To qualify you must also identify the person who provided the care for your child. You and your spouse if filing jointly must have earned income. The child care expenses paid should not be given to your spouse or someone claimed as a dependent on your taxes.

Thoughts on Children and Tax Credits and Breaks

For parents looking at getting their taxes filed, have you looked at the Child Tax Credit and Dependent Care Credit? How much do you qualify for? What credits are you claiming this year?

Becoming parents for the first time last year has been the biggest change in our lives. As other parents will tell you, it’s a joy and a responsibility to raise a little one. One of the first decisions we made when confirming the big news was starting a baby fund for our little one and our family.

Even before our little girl arrived, we had a baby fund ready.

Why Start a Baby Fund?

Some may wonder if we had any savings before we became parents; we did. Up until that point we were comfortable with the few months of expenses being covered by our emergency fund. When we found out we were expecting, though, we felt the need to increase the safety net.

For one thing, I’m self-employed which means any time I take off for maternity leave would basically mean no income from my business. Though we expected some monthly expenses to decrease (less eating out for example), we also assumed that we would need a buffer to help us as we get adjusted to being parents.

How Much Do You Need In Your Baby Fund

The next step to creating a baby fund is to figure out how much you want to save up. Of course, your needs depend on your specific family’s circumstances. However, here are some baby related expenses to consider when calculating the amount that is right for you:

•  Doctor Visits/Delivery Costs: Our visits to the obstetrician’s office was thankfully manageable. We talked to our family and friends who had babies recently to get a ballpark figure of what to expect for delivery costs.

We also checked with Human Resources with my husband’s  company to know what would be covered and what wouldn’t be. The total costs (for the prenatal visits and delivery at the hospital) came out to about $2,500.

• Diapers: Your preferences with diapers (disposable or cloth) can have a big impact on your expenses. Cloth diapers are more upfront, but it’s pretty much a one time cost. Baby Cheapskate and other sites like it can help you snag a great deal on cloth diaper sets, further lowering your costs.

Disposable diapers can be expensive in the long run. One tip I’d offer if you decide to go disposable is to use subscription services like Amazon Mom to have your diapers sent over to you and you can save around 30%. Our diaper costs have been around $20/month (not counting wipes – which can be found at stores like Costco for a great deal).

• Food: Whether you breastfeed or formula feed, food is an expense likely to increase when you have a little one (though it doesn’t have to be by much). For many parents the money they save from not eating out as often evens out the higher food costs. If you buy formula, use sites like the ones I mentioned in the diaper section to get bulk deals. It can amount to significant savings.

• Baby Gear: We had some money set aside for any items that we’d need that we didn’t get at the baby showers. Each little one is different so don’t be in a hurry to fill out all the gaps until your little one has arrived. You may be surprised at how little you’ll need. The money saved can be used for other baby expenses or you can put it into a college fund.

• Childcare: For many families, this is the biggest expense if both parents work. Use the time before the baby arrives to compare which options are best for your family’s circumstances and goals. Daycare varies greatly throughout the country, so please get local estimates.

How to Save for the Baby

For the two of  us, automated  transfers and savings were the main strategy. Whenever we got a windfall such as a tax refund or bonus from work, having an automated deposit or transfer has helped us stay on course. We also looked at ways to cut back on expenses on our monthly budget and transferred the money into savings.

Thoughts on Building a Baby Fund

Whether or not you start a baby fund as something separate from your other savings is up to you. The thing to focus on is having a safety net to help you make the transition into parenthood. If you’re looking for more information about baby expenses, please visit Couple Money where we and other parents have been sharing their own stories, tips, and advice on what works, what doesn’t, and what’s not worth stressing over.

Tax Tips for Newlyweds

Have a Financial Game Plan Ready

Before you two start tinkering on your finances, having an overall plan for your money and your goals can be incredibly helpful and empowering.

• Do you want to eventually own a house?
• Do either one of you want to start a business?
• Do you want to have children?
• What are your goals for work and retirement?

Get Your Withholding Squared Away

Once you’re married, you may want to update your withholdings. If you’re an employee, you should check out changing your W-4 with Human Resources. Going back to your goals that you’ve discussed, you may want to adjust your withholdings so you get more per paycheck throughout the year.

Perhaps you two may want to get a big tax refund so you can use that lump sum for a big financial goal. Each has its pros and cons, so the two of you have to decide what is the best match for you.

If you do expect a refund or you’re getting a slight increase in your paychecks after the adjustments, here are some suggestions on how you two can use the money:

• Build savings. Having a financial cushion in case of emergencies, a house down payment, or for starting a business can be a smart move.
• Pay down or knock out debt. Starting off your marriage with less debt can be a great financial win. Even if you can’t completely pay off the debt, paying down a bit can save you on interest charges.
• Boost your IRA. If you haven’t created one already, you can use the money to boost your retirement accounts.

Make Taxes Easier Next Year

Even though it’s a bit before you have to file your income taxes, it doesn’t hurt to get prepared now. It’ll make it easier for the two you and it could speed up process (and a refund) if done now.

When you file your taxes your name should match what the Social Security Administration has on record. If they don’t match, you’ll have problems with getting your taxes processed.

Just fill out a Form SS-5 (the application for a Social Security Card) and submit it either in person at the local U.S. Social Security office or U.S. Embassy. You must also submit proof of the name change, so have a certified copy of your marriage license. You can also mail it to the office along with the required documentation.

With just a little effort now you two can make filing taxes less stressful.

Thoughts on Taxes and Marriage

How many of you recently married? How are you two merging your finances? How’s the process going for you?

Indeed, summer vacation is greeted eagerly by children around the country (but not in my household, where my oldest is routinely distraught in late June by the reality of no school for an extended period). As for parents, they must prepare for challenge number one: keeping their children busy and out of trouble without breaking the bank.

Enter summer camp

Indeed, summer camp remains a ritual of growing up for some families.  Depending on the camp, the expense varies widely.  Fortunately, there is tax help – maybe.

The Child and Dependent Care Tax Credit  – Qualifications and Expense Limits

The Child and Dependent Care Tax Credit can be applied to summer camp expenses, subject to certain restrictions.  Your first consideration is the type of summer camp.  If your child sleeps over at the camp, that camp does not qualify.  In addition, if your child is 13 or older, he or she’s out – only expenses for kids 12 and under qualify for this credit.

Of course, it’s not as though you’ll instantly get tax help even if you decide to send your nine-year-old to day camp. That’s because there is another limit to the credit.  Once the total dollar amount spent on child care exceeds $3,000 per year for one qualifying child (or $6,000 for two or more qualifying children), you reach the maximum expense for which you can apply the credit towards.  This maximum amount includes not only day camp but also any child care expenses (including a nanny) you incur throughout the year.

Calculating the Child and Dependent Care Tax Credit

The calculation of the credit is based on the number of children under 13, your total child care expenses, and your adjusted gross income (AGI).  If you have one child and spend the maximum or more, you can multiply the top dollar amount ($3,000) by a rate based on your AGI which ranges from 20% to 35%.  The 20% rate applies to households whose AGI exceeds $43,000. Your income must be less than $15,000 to benefit from the maximum 35% rate.

If you have one qualifying child and earn $43,000 or more, your maximum credit may be $600 ($3,000 multiplied by 20%). If you have two or more qualifying children and $6,000 or more in expenses, you may receive a credit of $1,200 ($6,000 multiplied by 20%).  Keep in mind a credit reduces your taxes dollar-for-dollar and therefore may be more valuable than a tax deduction.

The Child and Dependent Care Tax Credit won’t make summer camp free, but it just might make it more affordable.  Just remember to use part of the savings for bug spray.

Dependents

Before you can get any of the tax breaks that you deserve, make sure your child has his or her own social security number. Now, when you file your tax return, you have an additional exemption to claim.

In 2011, an exemption represents a deduction against your income of $3,700 and in 2012 the exemption will increase to $3,800. Not to be confused with tax credits which are a dollar for dollar savings for you, these deductions simply reduce the final tally for your taxable income. In the 15% bracket this will save you $555, and at 25%, $925 in 2011, you get the idea.

If you adopted a child, you are eligible for The Adoption Tax Credit, up to $13,360 for 2011 to offset your out of pocket costs . The credit begins to phase out for couples with a Modified Adjusted Gross Income (MAGI) over $185,210 and is completely eliminated at a MAGI of $225,210 for 2011.

The Child Tax Credit is an additional $1,000 credit you may be eligible for if you have a child under 17. It’s available to couples whose MAGI is under $110,000 or $75,000 for a single parent, and phased out above these levels.

If you pay someone to take care of your child under the age of 13, while you are working or actively seeking work, you may qualify for a Child and Dependent Care Tax credit up to $1,050. Families that earn less than $15,000 can claim a credit for 35% of qualifying expenses up to 3,000 for one child and up to $6,000 for two or more children.  If your earned income is more than $43,000 you are still are allowed 20% of eligible costs.

If you are in the 25% bracket or higher, instead of the credit, it may make sense to use a Dependent Care Account (DCA) if your employer offers it. You may deduct up to $5000 pretax and apply for reimbursement of expenses for your child under the age of 13 (or older child incapable of caring for his or her self.) Important to note, even though the enrollment period is usually once a year, around November, the change in family status (i.e. having the new child) enables a during-the-year change request.

The Flexible Spending Account (FSA) is another opportunity to withhold pretax money. The typical limit offered by most companies is $5,000 per year. Similar to the DCA, this account is used to cover medical expenses, co-pays, prescription medicine, glasses, or other medical procedures not reimbursed by your insurance. While you may have one with or without a child, the hospital bills for a child birth add up, and this is a great way to cut your tax bill a bit further. This account is “use it or lose it,” so plan carefully. If December approaches and you realize there’s extra money, it’s time for new glasses. Non-prescription medicine is no longer eligible, although you can certainly ask your doctor to write one for aspirin, cough medicine, etc, during a regular visit.

By the way, just when you can’t remember what it was like to sleep through the night, your child will be a teenager and sleep till noon every chance he gets.

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Did you know, you may be able to claim your couch potato friend as a dependent?  Did you realize that support of your struggling aunt who didn’t live with you may qualify you for the dependency deduction?  Don’t feel bad, you would be surprised how many people don’t understand the dependency tax laws.

The bottom line is a dependent must be your “qualifying child” or “qualifying relative” and meet specific tests in order for you to claim them.

There are 5 test that will qualify a child as a dependent as follows:

• Relationship – Must be your child, adopted child, foster-child, brother or sister, or a descendant of one of these(grand or nephew).
• Residence – Must have the same residence for more than half the year.
• Age – Must be under age 19 or under 24 and a full-time student for at least 5 months. They can be any age if they are totally and permanently disabled.
• Support – Must not have provided more than half of their own support during the year.
• Joint Support – The child cannot file a joint return for the year.

There are 4 tests that will qualify a relative as a dependent as follows:

• They are not the “qualifying child” of another taxpayer or your “qualifying child”.
• Gross Income – Dependent earns less than $3,700 TY 2011 and $3,650 TY 2010.
• Total Support – You provide more than half of the total support for the year.
• Member of Household or Relationship – The person must live with you all year as a member of your household or be one of the relatives that doesn’t have to live with you see IRS Publication 501 for a list of qualifying relatives.

Many taxpayers are surprised to find they may be able to claim a boyfriend, girlfriend, domestic partner, or friend as a qualifying relative if:

• They are a member of your household the entire year.
• The relationship between you and the dependent does not violate the law (you can’t still be married to someone else.  Also check your individual state law.  Some states do not allow you to claim a boyfriend or girlfriend as a dependent even if your relationship doesn’t violate the law).
• You meet all the other criteria for “qualifying relatives” (gross income and support).

Here are  some common questions from our users that we answered:

Question:  My 26 year old is living with me.  He works and has made more than $3,600.  Can I claim him as a dependent?

Answer:  No, because your child would not meet the age test, which says your “qualifying child” must be under age 19 or 24 if a full-time student for a least 5 months out of the year.  He may be considered a “qualifying relative”, but his income must be less than $3,700 for 2011 and $3,650 for 2010.

Question:  I start work in September of this year and had my baby in March.  Can I claim my baby as a dependent on my taxes?

Answer:  Yes, even if you have a baby on December 31, you can claim them as a dependent on your taxes.

Question:  My boyfriend fully supports me.  We live with his mother, but we pay for our full support including rent.  His mother wants to claim us as dependents.  Who can claim the deduction?

Answer:  As long as your boyfriend is not married (be sure to check your individual state law regarding claiming a boyfriend or girlfriend some states don’t comply with the federal law), supplies over half of your support, and you lived with him the entire year, you did not earn more than $3,650 TY 2010 and $3,700 TY 2011, you would qualify as his dependent.  His mother could not claim you since she did not provide more than half of the support.

Question:  My spouse has not worked all year except for a month, can I claim him as a dependent?

Answer:  You cannot claim a spouse as a dependent.  If you file married filing jointly, you will get a personal exemption of $3,650 for TY 2010 and $3,700 for TY 2011 for each of you.

Now that you are armed with more knowledge about dependent tax laws, you may want to reconsider kicking out your free-loading friend.  They may help you get a larger refund.

For more information see our Who Counts as Your Dependent or Can I Claim My Girlfriend As a Dependent blogs.

Here are 5 important facts about this tax credit for child care expenses:

The Child & Dependent Care Credit

First, some basic information about the credit itself. It’s called the Child & Dependent Care Credit. The IRS covers the ins and outs extensively in an article on the credit, but we’ll summarize the key points here:

• The care must be provided for a qualifying person who is your dependent under the age of 13  when care was provided.  Note: Care may also be provided for your spouse or certain other dependents who are physically and mentally incapable of self-care.
• Your child or qualifying person must be in summer camp or daycare so that you can work or look for work (not just because you don’t feel like watching them).
• Your tax filing status must be single, married filing jointly, head of household, or qualifying widow(er) WITH a dependent listed on your return.
• The child must have lived with you for more than half of the tax year in question (2011, in this case).
• The care provider must be identified in your tax return and CANNOT be your spouse, the parent of your qualifying person, or your dependent child under the age of 19 by the end of the tax year.

Overnight Camps Don’t Qualify

source

Many parents will be relieved to hear that summer camp expenses can be deducted from their taxable income on 2011′s return. Unfortunately, there is a small caveat. While day camps (and daycare facilities) are eligible for deduction, overnight “stay-away” camps are not.  Attempting to deduct overnight camp expenses via the Child & Dependent Care Credit could land you in serious trouble in the event of an audit later on.

Home Babysitter or Daycare Facility?

source

Other parents will ask whether the credit applies only to established day care centers and summer camps, or whether it also applies to at-home babysitters. Luckily, it applies to both. So long as you meet the requirements for the Child & Dependent Care Credit, it does not matter whether the care is provided by a facility or a personally chosen babysitter. You simply need to provide your babysitter’s Social Security number on Form 2441.

What if your babysitter doesn’t provide their Social Security number, or you can’t track them down in time to file your return? The IRS says:

Answer: If you meet the other requirements to claim the child and dependent care credit, but are missing the social security number or taxpayer identification number of a provider, you may still try and claim the credit by demonstrating “due diligence” in attempting to secure this information. To prove you used “due diligence”, request that your day care provider fill out Form W-10, Dependent Care Provider’s ID and Certification to request the necessary information.  If this form is not used, you can use the following sources:

• Copy of the provider’s social security card.

• Copy of the provider’s completed Form W-4, Employee’s Withholding Allowance Certificate.

• Copy of a statement furnished by your employer if the provider is on your employer’s dependent care plan.

• Letter or invoice from provider.

The taxpayer must provide whatever information is available about the provider (such as name and address) on Form 2441 (PDF),Child and Dependent Care Expenses.  Write “see page 2″ in the columns requesting the missing information. Write at the bottom of page 2 that the provider refused to give the requested information.  Daycare providers who refuse to give the necessary information will face penalties.

Please note, if the daycare provider is a tax-exempt organization, such as a school or church, then you do not have to show the taxpayer ID number.  You can write “tax-exempt” in the space where the number is required.

35% of Qualifying Expenses

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A common misconception about the Child & Dependent Care Credit is that you can deduct ALL of your qualifying expenses. This is actually untrue. You are only eligible to deduct 20%-35% of qualifying expenses, depending on your adjusted gross income. The higher your adjusted gross income, the lower the percentage of the deduction.

The rules have not yet been changed for 2011, but last year, the requirements were:

Other Creditable Expenses

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Daycare or babysitting fees are the main deductible expenses, but they are not the only ones. You are also eligible to write-off the costs of ancillary services related to care, such as meal preparation or even housecleaning (if you hire a qualifying at-home babysitter.) The key to doing this successfully, as with other credits and deductions, is keeping extremely solid records.

The IRS knows how easy it is for unscrupulous taxpayers to invent “costs” out of thin air. Being targeted with an audit could mean the IRS is suspicious of that. The only way to protect yourself is with hard documentation proving your write-offs were valid. Our blog post Would Your Tax Records Survive a Natural Disaster was written precisely because records are so important – don’t neglect them when deducting summer care costs!

For more information related to this topic also check out our blog,  Writing Off Your Summer:  Preparing for Next Tax Season and Who Can I Claim as a Dependent for This Tax Year.

That said, one of the nice things about the tax code, and there aren’t too many nice things, is that there are a litany of tax benefits available only to families (or at least family units with dependents, such as children). I hadn’t spent much time thinking about it until just recently but I collected a bunch of tax tips I hope to use after our kid comes screaming out of the womb.

• Amend your health insurance. Having a child is considered a “life changing event,” which means you will be permitted to change your health insurance policy. This might be a good time to add the little one to your plan or make other changes you forgot to do the last time your plan renewed. The IRS states that you have 31 days from the event date to make changes but check with your provider for their schedule.
• Take advantage of that dependent care FSA. A dependent care FSA is an flexible spending account that can only used for dependent care. You can adjust this after a life changing event, so if you are still expecting and didn’t set one up yet, don’t fret. You can always adjust it after the birth. This will be offered by your employer and you can read more about it in Publication 503. How much you can save will depend largely on your tax bracket but every little bit helps!
• Child and Dependent Care Credit. In addition to the dependent care FSA, which is offered through your employer, there is a care credit that gives you a credit for expenses associated with supporting a “qualified dependent,” which would include your new child. The maximum credit you can receive for this, which is adjusted based on your income and actual expenses, is $3,000 a year.
• Child Tax Credit. The Child Tax Credit is a tax credit you get just for having a child! There are income limitations (the phase out starts at $110,000 and ends at $130,000) but it’s a direct tax credit of up to $1000, not a tax deduction, so it can have a big impact on your tax bill. This credit may be refundable depending on your income.
• Adjust your withholding. Now that you have a new baby, you have a new dependent and that reduces your tax bill. As a result, to avoid a larger than necessary tax rebate, you should adjust your withholding with your employer. This can be done by filing a new W-4 form and I recommend talking to your HR department to find the best way to do that.
• Check eligibility for the Earned Income Credit. The Earned Income Tax Credit is a credit given to low income individual and families, but the limit is quite low for those without children. In 2010, the limit was $18,470 for joint filers without children but it rises to $40,545 if you have one child. Check to see if you may now be eligible for the EITC after you have your baby.
• Consider a 529 plan or Coverdell Education Savings Account. With that child comes potentially going to college in eight years (and paying for it!). Now might be a good time to take a look at 529 plans, Coverdell ESAs, and other higher education perks. Coverdell ESAs are like Roth IRAs for education and 529 plans, which vary from state plan to state plan, are a little like very limited 401(k) plans for education.
• Get some sleep. I know that’s not a tax tip but being well rested is a good life tip!

Good luck!

Satisfying the gross income test

Unlike claiming a child as a dependent, it is not necessary that your elderly parent live with you. However, if your parent has gross income that is not exempt from tax of $3,650 or more, you cannot take their exemption on your return. When evaluating your parent’s gross income, do not include their social security payments and other tax-exempt pensions. Their gross income does include, however, dividends, capital gains from the sale of stock, interest earned in a bank account and other passive investments such as income from rental properties they own.

Satisfying the support test

Not only must your parent have minimal gross income, but you must also provide more than half their financial support during the tax year. Satisfying the requirements of the support test requires a comprehensive evaluation of your parent’s expenses. The fact that your parent receives sufficient income during the year does not necessarily mean the funds are used for their support. The support test looks to who actually pays rather than the parent’s ability to pay. For example, if your elderly parent only uses their Social Security benefits to pay $300 in monthly rent and you provide all other expenses that total more than $300 each month, then you will satisfy the requirements of the support test even if your parent puts thousands of dollars of tax-exempt income into a savings account each month.

Sharing your parent’s exemption

Oftentimes an elderly parent receives financial support from multiple children during the tax year. In total, the children may satisfy the support test; however, as individuals they may not. The IRS permits these siblings to take turns claiming the parent as a dependent if in the aggregate they can satisfy the support test. However, only a child who contributes at least 10 percent of the parent’s total support during the tax year is able to claim the dependency exemption. If you and your siblings agree to alternate claiming the exemption, the siblings who do not claim the exemption each tax year must sign a document stating that they will refrain from doing so in the current year.

Exemption limitations

If your Adjusted Gross Income (AGI) is more than the threshold amount for your filing status, you must reduce your total exemptions by 2 percent for each $2,500 or part of $2,500 that your AGI exceeds the limitation. However, the exemption will never be reduced to zero, regardless of your AGI. For example, in 2010, a single taxpayer with AGI of $166,800 or more must reduce the $3,650 exemption accordingly. Therefore, if your AGI is $169,400, you must reduce the exemption by 4 percent to $3,504 since the excess equals $2,600.