Improved Child Care Credit Expiring After 2010

You may not remember this, but way back in the days before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001) parents had much lower credits for child care (this article also applies to other dependent care credit as well).Improved Child Care Credit Expiring After 2010

Now Through 2010

Until the end of 2010, the credit allows for a range of between 20% (for an AGI over $43,000) to 35% (for an AGI of $15,000 or less) of the smallest of:
  • $3,000 ($6,000 for two or more qualifying children or dependents),
  • The total of the qualified dependent or child care expenses incurred and paid,
  • The taxpayer’s earned income, or
  • The spouse’s earned income
For example, a family of four with both parents working full-time might pay $100 a week for childcare.  Since most daycare outfits require payment even when the child isn’t in attendance, this works out to 52 weeks at $100 per week, or $5,200 in qualified child care expenses.  For the sake of example, the household AGI is assumed at $55,000. Under the current formula, this family can expect a tax credit for child care expenses of 20% of the total of their qualified expenses ($5,200) – a credit in the amount of $1,040.

Beginning in 2011

With the expiration (at the end of 2010) of the provision changing the credit, the credit amounts and income levels will revert back to the pre-2001 levels.  Under the old (and soon to be new) levels, the credit ranges from 20% (for AGI over $28,000) to 30% (for AGI of $10,000 or less) of the smallest of:
  • $2,400 ($4,800 for two or more qualifying children or dependents),
  • The total of the qualified dependent or child care expenses incurred and paid,
  • The taxpayer’s earned income, or
  • The spouse’s earned income
Using our family from the example above, under the new formula the family can expect a tax credit for child care expenses of 20% of $4,800 (their $5,200 exceeds the upper limit) – a credit of $960.  This is $80 less in tax credit versus the old method.
Photo by Photos.com
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

An IRA Owner's Manual
A Social Security Owner's Manual

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Copyright 2014 FiGuide.com   About Us   Contact Us   Our Advisors       Login