Dependent Care Deductions
There is a tax credit for expenses paid for dependent care. This credit may be reduced if you receive certain dependent care benefits from an employer. In that case, you and be concerned with dependent care deductions.
There is a tax credit associated with the cost of dependent care. The rules and regulations for taking this credit, as would be expected, are very complex. The credit is limited to 35% of actual expenses. Since it is a credit, however, that comes directly off your taxes owed; it is an important fact in your individual tax obligation. In some cases, this credit will be reduced if you receive dependent care benefits. This is where the idea of dependent care deductions would come into play. To maintain equality with taxpayers that can claim the credit, the amount paid to the employee as a dependent benefit should be a deductions from your taxable income.
The types of benefits that can reduce your credit are direct cash payments intended for dependent care that come from your employer and the fair market value of care that is provided by the employer. Also, pre-tax contributions to a dependent care plan. The fair market value provision causes the most confusion to most tax payers. The logic here is that the credit exists to ease the way of tax payers who must care for dependents, and if this care is being provided in part by the employer through a free day care center, the way is being eased.
However, when the benefit is being paid to the employee directly to use for dependent care and this reduces their eligibility to take a credit, it is logical to exclude the income from the taxable income. The employer will be able to tell you if your plan is a qualified plan and eligible for such an exclusion.
The dependent care deductions can be claimed on Part III of Form 2441 or on Schedule 2 of Form 1040A. The tax payer can not use 1040EZ if they are claiming any dependent care deductions. If the tax payer is self employed, they are treated as both an employer and an employee for the purposes of this deduction. This is one of those IRS complex instructions that tell us that Form 1040C, line 14, Schedule E, line 18 or 28, or Schedule F, line 17 can be used to claim the payments as expenses and the deductions are then claimed on Form 2441.
The tax codes are generally favorable for dependent care situations, but the rules and regulations are very detailed. There are several tests that must be passed for dependent care credits can be claimed. However, the tax code does not penalize tax payers lucky enough to have employer sponsored dependent care benefits. In fact, the system, as well as the general attitude of the population, is toward the extensions of benefits to encourage and enable proper care of dependents.