Planning to adopt a child or children? Or, are you already an adoptive parent? If so, we have good news for you! You may be able to qualify for an income-tax credit. This credit will be based on the amount of expenses you have incurred during the adoption period, which are directly related to the adoption of the following: 1. A child under the age of 18, or 2. a person who is physically or mentally incapable of self-care.
This is a 1:1 credit for each dollar of qualified expenses up to a maximum for the year, which is $13,570 for 2017 (up from $13,460 in 2016). The credit is nonrefundable, which means it can only reduce tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be used for up to five years to reduce future tax liability.
Qualified expenses generally include adoption fees, court costs, attorney fees and travel expenses that are reasonable, necessary and directly related to the adoption of the child, and may be for both domestic and foreign adoptions; however, expenses related to adopting a spouse’s child are not eligible for this credit. When adopting a child with special needs, the full credit is allowed whether or not any qualified expenses were incurred. A child with special needs is, among other requirements, a child who the state has determined (a) cannot or should not be returned to his or her parents’ home and (b) that the child won’t be adopted unless assistance is provided to the adoptive parents.
The credit is phased out for higher-income taxpayers. For 2017, the AGI (computed without foreign-income exclusions) phase-out threshold is $203,540, and at the AGI of $243,540, the credit is completely phased out. Unlike most phase-outs, this one is the same regardless of filing status. However, the credit cannot be claimed by taxpayers using the filing status married filing separately.
If your employer has an adoption-assistance program, up to $13,570 of reimbursements by the employer are excludable from income. Both the tax credit and the exclusion may be claimed, though not for the same expenses.
If you think you qualify for this credit or are planning an adoption in the future, please contact Dagley & Co. for further credit details and to find out how this credit can apply to your particular circumstances.
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Are you a childcare provider? If so, did you know are certain tax laws that provide you and your business with special tax breaks? These breaks include deductions for travel, capital purchases, supplies, children’s meals and the business use of your home. Dagley & Co. has broke down each tax break category for you:
Travel – Your auto expenses are based on the number of qualified business miles that you drive. Auto expenses for you (as a day care provider) could include transportation:
- To and from a class taken to enhance your day care skills;
- For field trips with those for whom you are providing care;
- For errands related to day care business (e.g., going to the bank to deposit day care receipts or to the store to shop for day care supplies); or
- To chauffeur day care attendees.
To claim business use of your vehicle, use the actual expense method or the standard mileage rate. However, the actual method requires far more detailed records; you must keep track of your business miles and total miles to prorate the costs of fuel, insurance, repairs, etc. You will probably find the standard mileage rate to be far less complicated, as you only need to contemporaneously record your business miles and the purpose of each trip. Even with the standard method, you’ll still need to know the total miles driven for the year. For 2017, the rate is 53.5 cents per mile, down from 54.0 cents per mile in 2016.
Capital Purchases – Capital items are those that normally last more than one year, including cribs and playground equipment. Be sure to keep receipts for these items, as they can generally be depreciated or expensed, whichever works best for you.
Supplies and Business Expenses – The cost of items such as crayons, coloring books, paper plates, cups, cleaning supplies, and first aid supplies are also deductible in the year they are purchased. However, you need to keep receipts for all such purchases.
Food – You can also deduct the actual cost of any food that is provided to the children in your care. It can be a bookkeeping nightmare to keep track of which grocery items were purchased for the childcare business and which were for personal consumption. Luckily, the government allows a care provider to deduct standard meal rates in lieu of actual amounts. This method does not require you to keep grocery receipts, and the IRS will not contest a food deduction based on the standard rates. The rates are the same throughout the contiguous U.S. states, with higher allowances for Alaska and Hawaii.
Year State Breakfast Lunch Dinner Snack 2016 ContiguousAlaska
Business Use of the Home – Generally, when a taxpayer claims a business deduction for the use of his or her home, the portion of the home that is used must be exclusively used for business purposes. Knowing that childcare providers do not use a specific space in the home 100 percent of the time, Congress added an exception related to the business’s licensing, certification, registration, or approval as a day care center or family/group care home under the provisions of any applicable state law. This exception applies only if the childcare owner or operator has applied for, been granted, or is exempt from such approval. In addition, the exception does not apply if the services performed are primarily educational or instructional in nature (e.g., musical instruction). However, the exception does apply if the services are primarily custodial, such that any educational, developmental or enrichment activities are only incidental to the custodial services. The services must be provided for adults age 65 or older, children, or other individuals who are physically or mentally incapable of caring for themselves.
When calculating the percentage use of a home for business, there are two factors: the space used to operate the day care business and the amount of time that the space is used to provide day care, including preparation and cleaning time.
Example – Edna uses her living room, kitchen, and bathroom ten hours a day, five days a week to provide licensed day care services. The home is 2,400 square feet, and the living room, kitchen, and bathroom are a combined 1,400 square feet. Edna’s percentage use of her home for business is determined as follows:
Edna’s Home Use Expenses (full year)
Homeowner’s Insurance 550
Mortgage Interest 6,150
Property Tax 2,550
Business Deduction $2,514 (.1736 x $14,480)
There is also a simplified deduction method for the business use of a home; it may be useful for individuals who work from a home office, but it is generally unsuitable for a childcare business.
The deduction for the business use of a home is limited to gross income from the business. If that limit applies to you, any home mortgage interest and property taxes that you have paid, as well as any casualty losses that you have incurred for the year, are always deductible when you itemize deductions, regardless of whether you claim a deduction for the business use of the home.
If you have questions related to how any of these tax breaks apply to you and your childcare business, please give Dagley & Co. a call.
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There is a tax break working parents should know about with the summer hitting. Many working parents must arrange for care of their children under 13 years of age (or any age if handicapped) during the school vacation period. A popular solution — with a tax benefit — is a day camp program. The cost of day camp can count as an expense toward the child and dependent care credit. But be careful; expenses for overnight camps do not qualify.
For an expense to qualify for the credit, it must be an “employment-related” expense; i.e., it must enable you and your spouse, if married, to work, and it must be for the care of your child, stepchild, foster child, brother, sister or stepsibling (or a descendant of any of these) who is under 13, lives in your home for more than half the year and does not provide more than half of his or her own support for the year. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit.
The qualifying expenses are limited to the income you or your spouse, if married, earn from work, using the figure for whoever earns less. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled.
The qualifying expenses can’t exceed $3,000 per year if you have one qualifying child, while the limit is $6,000 per year for two or more qualifying persons. This limit does not need to be divided equally. For example, if you paid and incurred $2,500 of qualified expenses for the care of one child and $3,500 for the care of another child, you can use the total, $6,000, to figure the credit. The credit is computed as a percentage of your qualifying expenses; in most cases, 20%. (If your joint adjusted gross income [AGI] is $43,000 or less, the percentage will be higher, but it will not exceed 35%.)
Example: Al and Janice both work, each with earned income in excess of $40,000 per year. Janice has a part-time job, and her work hours coincide with the school hours of their 11-year-old daughter, Susan. However, during the summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their child credit would be $600 (20% of $3,000).
The credit reduces a taxpayer’s tax bill dollar for dollar. Thus, in the above example, Al and Janice pay $600 less in taxes by virtue of the credit. However, the credit can only offset income tax and alternative minimum tax liability, and any excess is not refundable. The credit cannot be used to reduce self-employment tax or the taxes imposed by the Affordable Care Act.
If you have questions about how the childcare credit applies to your particular tax situation, please give Dagley & Co. a call.
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