Tax News

CCH (cch.taxgroup.com) reports:

Final regulations relating to the child and dependent care tax credit (Code Sec. 21) have been adopted. These regulations, which reflect law changes since 1984, apply to tax years ending after August 14, 2007. The final regulations adopt, with changes, proposed regulations that were publishedon May 24, 2006 (NPRM REG-139059-02).
The child care credit is a nonrefundable credit for a percentage of expenses for household and dependent care services necessary for gainful employment. The credit is available to a taxpayer with one or more qualifying individuals. A qualifying individual is the taxpayer's dependent who has not reached age 13 or a taxpayer's dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than one-half of the tax year.
The applicable percentage ranges from 20 percent to 35 percent, depending on the taxpayer's adjusted gross income. The amount of employment-related expenses that may be taken into account in determining the credit in any tax year is limited to $3,000 if there is one qualifying individual and $6,000 if there are two or more qualifying individuals.
Summer School, Day Camp
The final regulations clarify that the costs of summer school and tutoring programs are not qualifying employment-related expenses because they are educational in nature. A further clarification provides that the requirement that a dependent care center must comply with applicable state and local laws also applies to a day camp that meets the definition of a dependent care center in Code Sec. 21(b)(2)(D) by providing care for more than six persons in return for a fee. The final regulations retain the proposed rules that provided that the full amount paid for a day camp or similar program may constitute a qualifying employment-related expense, even though the camp specializes in a particular activity, such as soccer or computers. Similarly, the full amount paid for an education day camp that focuses on reading, math, writing, and study skills may be a qualifying expense. No portion of the cost of an overnight camp, however, is an employment-related expense.
Care Centers for Sick Children
A commentator suggested that the cost of sending a child to a sick care center should be treated as a qualifying expense. The IRS declined this suggestion. Whether the cost of sending a child who is too sick to be cared for by a regular day care center or other primary care provider is a qualifying child care expense or an expense for which a medical deduction may be allowed is a factual matter that must be determined on a case-by-case basis.
Absence from Work
Generally, qualifying expenses must be for periods during which a taxpayer is gainfully employed or is in active search of gainful employment. A taxpayer must allocate the cost of care on a daily basis if expenses are paid during a period in which a taxpayer is not employed or in active search of employment. The proposed regulations provided an exception to the allocation requirement for a short, temporary absence from work for a taxpayer paying dependent care on a weekly, monthly , or annual basis. The final regulations eliminate the requirement that the temporary absence exception only applies to taxpayers who pay for care on a weekly, monthly, or annual basis.
In addition, the new rules clarify that only those costs that a taxpayer is required to pay during the absence (e.g., while ill or on vacation) qualify for the exception. Examples are added to illustrate these rules. A safe harbor that treats an absence of no more than two consecutive calendar weeks as a short, temporary absence is also included.
Suggestions that the cost of care should be treated as an employment-related expense for any period that a taxpayer is on short- or long-term disability leave under the Family Medical Leave Act, paid medical leave, or paid maternity leave were rejected as inconsistent with the requirement that qualifying expenses must be paid to enable a taxpayer to be gainfully employed.
Shift Workers
The final regulations clarify that costs of overnight care and day care for parents who work at night and sleep during the day may be qualifying expenses.
Students at On-Line Institutions
In the case of married taxpayers, qualifying expenses are limited to the earned income of the lower earning spouse. A nonworking spouse who is a full-time student at an educational institution described in Code Sec. 170(b)(1)(A) for at least five months during the year is deemed to have earned $250 for each month of school attendance ($500 per month if there are two or more qualifying children).
The final regulations do not adopt a suggestion that a full-time student at an on-line degree program qualifies for the imputed income amount. The statute requires that the educational organization have students in attendance at the place where its educational activities are regularly carried on. However, an individual who takes online courses at a school that has traditional classroom instruction as well as on-line course may be a student for purposes of the deemed earned income rule.
Kindergarten Expenses
A commentator suggested that parents who send a child to a full-time private kindergarten because the public system only offers half-day kindergarten should be allowed to treat a portion of the expenses as qualifying expense. The IRS declined this suggestion on the grounds that kindergarten is considered a nonqualifying educational cost regardless of whether a child attends part-time or full-time. Similarly, qualifying expenses do not include the cost of sending a child to a private school even though the taxpayer lives overseas in a place where public education is unavailable.
Live-In Caregivers
The final regulations retain the rule that the additional cost of providing room and board for a caregiver over usual household expenses may be an employment-related expense. The final regulations have been clarified to provide that an increase in the cost of utilities attributable to providing room and board to a caregiver may constitute a qualifying expense.
Law Changes
The final regulations reflect recent statutory changes that were not reflected in the proposed regulations. They provide that the special dependency rule of Code Sec. 21(e)(5) applies to children of parents who live apart at all times during the last six months of the calendar year, as well as to the children of separated or divorced parents. Changes made to the definitions of qualifying individual and custodial parent by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135) are also reflected. Finally, the final regulations clarify that, for tax years beginning after December 31, 2004, costs for care outside the taxpayer's household of a qualifying individual who is a dependent or spouse incapable of self-care who regularly spends at least eight hours each day in the taxpayer's household may continue to qualify for the credit.
Rev. Rul. 76-278, 1976-2 CB 84, and Rev. Rul. 76-288, 1976-2 CB 83, are obsoleted.
T.D. 9354, 2007FED ¶47,062
Other References:
Code Sec. 21
CCH Reference - 2007FED ¶3390
CCH Reference - 2007FED ¶3503D
CCH Reference - 2007FED ¶3504D
CCH Reference - 2007FED ¶3505D
CCH Reference - 2007FED ¶3506D
Tax Research Consultant
CCH Reference - TRC INDIV: 57,050

State Headlines

Ohio --Sales and Use Tax: Ohio Represented on SST Task Force Formed to Tackle Sourcing Issue
Ohio Rep. Bob Gibbs, R-Lakeville, is representing the state on a national task force assembled by the Streamlined Sales Tax Governing Board to analyze the effect of a shift from origin-based sourcing to destination-based sourcing, and to develop solutions for businesses that would be impacted by such a change.
The Streamlined Sales and Use Tax (SST) Agreement requires that by January 1, 2008, retailers in member states collect sales tax based on the rate at the sale's destination rather than the rate at the sale's origin. However, Ohio's budget legislation exempts retailers with less than $500,000 in annual delivery sales in Ohio from destination-based sourcing beginning January 1, 2008 (see TAXDAY, 2007/07/03, S.31). In response to this legislation, the Board assembled the task force to develop a solution to the sourcing issue before the Board's meeting next month.
Concerns over destination-based sourcing are largely voiced by small Ohio businesses that engage in delivery sales because local tax rates vary and businesses with over $30 million in annual delivery sales already must source by destination. In addition, Ohio is the largest state participating in the Agreement, and the task force's conclusions may determine whether Ohio may continue to participate. Gibbs warns that, "if we do not have a satisfactory solution by October 1, Ohio will no longer be an active participant."
News Release, Ohio Department of Taxation, August 13 , 2007.