Working parents may be a little surprised and frustrated by new rules relating to the tremendously popular child and dependent care tax credit. While over 6 million taxpayers took this credit last year, some of the finer points governing taking it were still “under construction” by the IRS rulemaking gurus … until recently. “Final regulations” from the IRS have just been released. They clarify certain issues, make other heretofore informal positions formal, and make new rules for a number of situations.

Under the recently issued final regs, the IRS says the costs for overnight camp, educational and tutoring programs, summer school, and kindergarten or higher grade expenses do not qualify for the tax credit. According to the IRS, expenses for these programs are not “employment-related” or “for care,” and therefore not eligible to receive the tax advantages of the credit. However, the full amount paid for an education day camp that focuses on reading, math, writing and study skills may be a qualifying expense.

Temporary absence from work

Generally, qualifying expenses must be for periods during which a taxpayer is gainfully employed or is actively searching for employment. A taxpayer must allocate the cost of care on a daily basis if expenses are paid during a period in which a taxpayer is not employed or is not actively looking for employment. The final regulations provide an exception to this allocation requirement for a short, temporary absence from work for all qualified taxpayers paying dependent care, not just those paying for care on a weekly, monthly or annual basis.
Moreover, the regulations provide a safe harbor that treats an absence of no more than two consecutive calendar weeks as a short, temporary absence.

Live in caregivers

The additional cost of providing room and board for a caregiver over usual household expenses may be an employment-related expense, the final regs provide. The regulations clarify that an increase in cost of utilities attributable to providing room and board to a caregiver may constitute a qualifying expense.

Parents who live apart

The final regulations also provide that under the special dependency rule of Code Sec. 21(e)(5), only the custodial parent may claim the child and dependent care credit. The rule applies to children of parents who lived apart at all times during the last six months of the calendar year, as well as children of separated and divorced parents.

Claiming the credit

To claim the child and dependent care credit, taxpayers must file Form 2441, Child and Dependent Care Expenses, as well as Form 1040, or file Schedule 2 with Form 1040A.

If you would like to learn whether you and your dependents qualify for the child and dependent care tax credit, or what types of care and programs qualify for the credit, please call our office today.

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