Making Full Use of Child Care Tax Benefits

Article excerpt

You've shown an enormous interest in all aspects of child care, particularly how to make full use of the available tax benefits. This has been underlined by the strong response to my recent column on child care.

Many of you have written to me with specific questions. Others have come forth with observations on Social Security tax requirements and the complexity of forms that have to be filed with the government.

As a result, I turned to Eli J. Warach, tax attorney and chief editorial consultant for Prentice Hall. The two of us have worked up a series on day care based on your queries to me.

QUESTION: In your columns on the child-care credit, you state that the maximum credit available for one child is $480 and $960 for two or more children. I thought it could be more than that.

ANSWER: You are right. In theory, the credit could be more. It depends on the amount of your adjusted gross income.

For instance, if your adjusted gross income is $10,000 or less, the credit percentage is 30 percent. The maximum expense for figuring the credit remains the same. So for one child, the maximum expense is $2,400; for two or more children, $4,800. At a 30-percent credit rate, the top credit for one child is $720; $1,440 for two or more children. And that credit percentage drops one point for each $2,000 (or fraction) over $10,000. However, it never drops below 20 percent.

There is, of course, a practical problem - and that's why we generally use the 20 percent figure ($28,000 or more in adjusted gross, which results in maximums of $480 and $960). How does someone with $10,000 or less in adjusted gross income afford $4,800 a year in child-care payments?

Q: My mother is supported by me and qualifies as my dependent. I have been contributing about $5,000 a year to her support. She has some municipal bonds that earn about $2,500 a year. …