By Stacie Clifford Kitts, CPA

You might be confused about who can claim the childcare credit……especially if you are divorced, separated, or splitting your dependents between yourself and your ex-spouse.  Maybe you are paying the childcare as part of your divorce agreement.  But hold on, paying it doesn’t necessarily get you a credit.

Here are some helpful items that will clarify who gets to claim the credit.  If you are divorced or separated, pay particular attention to the rules about custodial parents.

Basically you must be the custodial parent to get the credit.  This means that your child must have lived with you for a greater number of nights during the year.  If each parent had the child for the same number of nights, the parent who makes the most money gets the credit.

So check out this list from the IRS:

1. The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.
2. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.
3. You – and your spouse if you are married filing jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or they were physically or mentally unable to care for themselves.
4. The payments for care cannot be paid to your spouse, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.
5. Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.
6. The qualifying person must have lived with you for more than half of 2010. However, see Publication 503, Child and Dependent Care Expenses, regarding exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents.  See below for a bit about Child of divorced or separated parents from Publication 503
7. The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.
8. For 2010, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
9. The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.
10. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. For information, see Publication 926, Household Employer’s Tax Guide.

Taken from Publication 530:

Child of divorced or separated parents or parents living apart. Even if you cannot claim your child as a dependent, he or she is treated as your qualifying person if:

• The child was under age 13 or was not physically or mentally able to care for himself or herself,
• The child received over half of his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the calendar year,
• The child was in the custody of one or both parents for more than half the year, and
• You were the child’s custodial parent. The custodial parent is the parent with whom the child lived for the greater number of nights in 2010. If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income. For details and an exception for a parent who works at night, see Pub. 501.

The noncustodial parent cannot treat the child as a qualifying person even if that parent is entitled to claim the child as a dependent under the special rules for a child of divorced or separated parents.

Links:

• Publication 503, Child and Dependent Care Expenses (PDF 167K)
• Form W-10, Dependent Care Provider’s Identification and Certification (PDF 31K)
• Form 2441, Child and Dependent Care Expenses (PDF)
• Form 2441 Instructions (PDF 32K)
• Publication 17, Your Federal Income Tax (PDF 2,075K)
• Tax Topic 602