child care credit

[oceanlovin'ea]

Client (married couple) were awarded custody of their granddaughter as fosterparents. The court ordered she be in daycare. Husband was laid off in 2010 and had no earned income in 2011. They had her wages and his unemployment.

There was a "miscommunication" with state agencies. They are supposed to pay for all the daycare except $9 per week that client pays. Well, in December of 2010 they were told they didn't qualify because grandfather was unemployed. They argued it was court ordered but an untrained person didn't know that a different form should have been used. So they paid for the child care all year. Now a new social worker is trying to get it all fixed.

But in the meantime they paid the child care because it was court ordered. If they didn't comply, the child would probably have been removed from their home.

The instructions for Form 2441 say that parents have to be working or looking for work to get the credit. But the only exception that lets them have the credit is if he is going to school or disabled.
Does anyone know where I can look for guidance to see if there is a case like this before. Surely there has been. I am just not sure where to look.

Thanks.

Linda, EA

[ChEAr$]

I think your clients will be out of luck on this one, cause IRS rules trump what state courts say in this regard at least, since it's not a question of legalities.

Simply put, IRS regs say that if one parent is out of work and doesn't otherwise qualify (student, looking for work etc) then he COULD have taken care of child at home, hence no child care credit.

I always remember the case where husband had full time job, and mom owned and ran a flower shop and child was in day care. No child care credit, since mom's business came up with a loss for the year.

[oceanlovin'ea]

don't understand wording

The wording says working or looking for work. This man is looking for work. He just hasn't found any work. He has worked since he was 13 he told me. He says he doesn't like being a "kept" man.
If looking for work qualifies, then why isn't there a way to document "looking for work"?

You are probably right and they are out a credit of $600. But more importantly they are out the $4800 they paid for daycare because the state will never pay them back.

Linda, EA

[taxea]

If he has documentation of his looking for work I would take it.

[S T]

Pub 503

The Tests to Claim the Credit

#2 - Must have earned income during the year

Earned Income Test -
What is not earned income? Earned income does not
include:
· Pensions and annuities,
· Social security and railroad retirement benefits,
· Workers’ compensation,
· Interest and dividends,
· Unemployment compensation,
· Scholarships or fellowship grants, except for those reported on Form W-2 and paid to you for teaching or other services,
· Nontaxable workfare payments,
· Child support payments received,
· Income of a nonresident alien that is not effectively connected with a U.S. trade or business, or
· Any amount received for work while an inmate in a penal institution

Work or Looking for Work

Work also includes actively looking for work. However, if you do not find a job and have no earned income for the year, you cannot take this credit. See Earned Income Test,
earlier.

I would say according to this info, they would not be able to claim the child care credit.

Sandy

.

[Gary2]

You are probably right and they are out a credit of $600. But more importantly they are out the $4800 they paid for daycare because the state will never pay them back.

If the state should have paid it, but didn't because the wrong form was filed, and the new social worker can't fix it, it's time to contact the local state legislator(s). Sometimes if you squeak the right wheel, they're the ones who can find the grease.

This goes double if it was a state employee who filed the wrong form.

[FEDUKE404]

Very slim chance

I think the child care expenses are up the creek.

The only slim chance that exists is the "looking for work" aspect.

The underlying concept of Form 2441 is that a person (or persons) incur expenses so that they can be gainfully employed. Think of it as a quasi- "business" expense.

The form limits the amount of allowable expenses (for MFJ) to the smaller amount of income earned by a filer. Allowances are made for a person who "works" going to school or "works" by being disabled, where specific dollar amounts of "wages" are allowable. (See the instructions for entering those numbers on line 4 or on line 5.)

The grandmother has wages. The grandfather has no wages, and he is not disabled.

I just don't see how this situation fits, unless a preparer really wants to push the envelope and/or live dangerously.

FE

[oceanlovin'ea]

called IRS

I called IRS and talked to the tax law department. No credit for this client. I was on hold for about 15 minutes while she researched the situation but came back with no credit because taxpayer didn't have earned income.

Glad that I called so that I can tell my client I tried. I will suggest they go see their congressman as someone suggested.

Linda, EA