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By Michael O'Connor , Juan Pelayo
The Child and Dependent Care Credit is allowed for work-related expenses incurred for dependents of the taxpayer. Generally the dependent must be under the age of 13. However, if the child has a disability and requires supervision, the age limit is waived. For example, a 16-year-old with severe AD/HD and a behavior disorder who cannot be left alone without adult supervision would be a qualifying child for this credit.
Expenses up to $3,000 per year for one qualifying dependent and up to $6,000 for two or more qualifying dependents are allowed. Expenses for regular child care services, after-school programs and summer camps qualify, although overnight summer camp expenses do not. Payments to a relative to care for a child also qualify, as long as the relative is not a dependent of the taxpayer. For 2009, the credit is calculated at 20% to 35% percent of allowable expenses, based on the family's adjusted gross income. The average credit is about $600 but can be as high as $2,100. (See IRS Publication 503, "Child and Dependent Care Expenses.")
A taxpayer is entitled to claim an exemption for each qualified dependent. This may appear relatively straightforward, but caretakers, such as grandparents, aunts or even foster parents, may overlook exemptions. Also, in some cases following a divorce, a noncustodial parent who provides the majority of support for a child with a severe learning disability, and pays for medical/educational expenses related to the child's learning disability, may likewise qualify for both the exemption and medical expense deductions.
A new definition of "qualifying child" took effect in the 2005 tax year; the most significant change is that the taxpayer need not show support for a qualifying child, but the child must live with the taxpayer for more than six months. For each dependent, there is an exemption from taxable income, worth $3,650 for the 2009 tax year. For a taxpayer with a marginal tax rate of 28%, each exemption will reduce the tax liability by $1,022. Equally important, the dependency status is required for some tax benefits such as the child and dependent care credit listed above. Also, dependents under age 17 qualify for the Child Tax Credit, worth up to $1,000 per child. (See IRS Publication 501, "Exemptions, Standard Deduction and Filing Information," and "Instructions to Form 1040.")
Note: The gift tax — which for 2009 imposes a tax on the donor for gifts over $13,000 — generally doesn't apply to payments for medical expenses or education. This is a complex topic and should be discussed with a tax advisor when a taxpayer provides, or plans to provide, an amount greater that $13,000 to anyone not a dependent. For tax year 2010, the same $13,000 limit applies.
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