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Dependent Care Credit

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in Small Business Tax,Small Business Tax Deduction Strategies

Double your tax credits for children. If you and your spouse pay someone to watch your under-age-13 children while you work, you can claim a dependent care tax credit (commonly called the child care credit). Strategy: Don't confuse the child care credit with the child tax credit. If you qualify, you can claim both credits on your 2003 return.

If your adjusted gross income is above $43,000, the dependent care credit is equal to 20 percent of the first $3,000 of your qualified expenses for one child, or 20 percent of the first $6,000 for two or more children.

In comparison, the child tax credit has nothing to do with baby-sitting—any parent can claim it for dependent children under age 17. The credit is $1,000 per child this year but must be reduced by the advance-credit check you received last summer. (See 3/8/04 issue.)

Go 'back to school' for extra credit. To earn the dependent care credit, you and your spouse must spend child care money so you can remain "gainfully employed." Strategy: Claim the credit even if one spouse works part time or goes to school full time.

Say your spouse takes accounting courses at a local college in preparation for returning to work. As long as your spouse is a full-time student—enrolled for at least five consecutive months—you can claim the credit.

Clean up on your tax return. You can also claim the dependent care credit for someone who does more than watch your children. Strategy: If you have a nanny, au pair or housekeeper who cares for your kids and does some cooking and cleaning, you don't need to allocate expenses attributable to just child care. That person's entire salary counts as "qualified expenses" for the credit. Note: To earn the credit on those expenses, you must pay and report employment taxes for the household worker and attach Schedule H to your Form 1040.

Make the credit child's play. The dependent care credit doesn't have to be all work and no play. Strategy: Sign up your child for day camp during the summer and other extended breaks from school. Those expenses qualify since they allow you and your spouse to be gainfully employed—even if the child care occurs during a time when you're both off work. Note: Costs associated with overnight camp don't qualify for the child care credit.

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