Thursday, January 29, 2009

Child Care credits/deductions

I was doing some reading up on the economic stimulus plan that passed the house yesterday, looking for specific details about how it might put money in the pockets short term for the non-business owner like myself. I read this article and a couple others which all mention the same sort of thing with no fine details:

The bill also gives most taxpayers breaks of $500 each on their payroll taxes and increases tax breaks for college tuition, first-time homebuyers and child care.

So, it appears that there is some notion of getting $500 tax credits on payroll taxes as well as additional tax deductions or credits that are given for college tuition, first-time homebuyers, and child care. I never read much on the child care credits and was wondering how sending you child to preschool might be accounted so I read up on it.

Preschool is a valid child care tax expense however there are implications which may disallow claiming it for certain people. The child care expense tax implications are all explained in only a way the IRS can explain something, by calling it "IRS Publication 503" which can be found here. One of the interesting things is that if you have a stay at home parent with no earned income you cannot claim any child care expenses including preschool. To claim all of the preschool expenses, the stay at home parent would need to have an earned income of at least as high as what you are attempting to claim as expenses or you can only claim as much as they make. Here is an example from the IRS with some minor edits.
Your earned income for the year was $18,000. Your spouse's earned income for the year was $2,000. You paid work-related expenses of $3,000 for the care of your 5-year-old child and qualified to claim the credit. The amount of expenses you use to figure your credit cannot be more than $2,000 (the smaller of your earned income or that of your spouse).

See, its designed to be a "work related expense." the IRS says this means that both of these have to be true:
  • They allow you (and your spouse if you are married) to work or look for work.
  • They are for a qualifying person's care.

But it seems that according to the IRS the stay at home parent isn't working unless they have earned income. Tell that to a stay at home parent and you might get slapped ;-) I thought this was the last interesting part:
Volunteer work. For this purpose, you are not considered to be working if you do unpaid volunteer work or volunteer work for a nominal salary.

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