Changes to Form 3506, Child and Dependent Care Expenses Credit
The 2011 Child and Dependent Care Expenses (CDC) Credit is no longer a refundable credit.
Senate Bill 86 made the CDC credit nonrefundable for tax years beginning on and after January 1, 2011, so the credit cannot reduce a taxpayer's liability below zero. See FTB Form 3506.
Qualifications for the CDC Credit
To assist your clients claiming the CDC credit and avoid processing delays, make sure all of the following eight qualifications are met:
- Married taxpayers or registered domestic partners (RDP) must file a joint return to claim the credit. However, the credit may be claimed on a separate return if the:
- Taxpayer lived apart from their spouse/RDP at all times during the last six months of 2011.
- Qualifying person(s) lived in the taxpayer’s home for more than half of 2011.
- Taxpayer provided over half the cost of keeping up their home.
- Care must be provided in California for one or more qualifying persons.
- Any of the following can be a taxpayer's qualifying person :
- A child under the age of 13 who meets the requirements to be the taxpayer’s dependent as a Qualifying Child.
- A child who turned 13 during the taxable year only qualifies for the credit for expenses incurred up to, but not including, the child's 13th birthday.
- The taxpayer's spouse/RDP that was physically or mentally incapable of self-care.
- The taxpayer's dependent, regardless of age, which was physically or mentally incapable of self-care.
- Any person who was physically or mentally incapable of self-care and would have been the taxpayer's dependent except that:
- They received gross income of $3,700 or more.
- They filed a joint return.
- The taxpayer or taxpayer's spouse/RDP with whom a joint return is filed could be claimed as a dependent on someone else’s 2011 return.
- The qualifying care expenses must be paid by the taxpayer so that the taxpayer (and spouse/RPD) could work (full-time or part-time), attend school full-time, or seek employment.
- Qualifying care expenses include:
- Expenses related to sending a child to a pre-kindergarten educational program such as nursery school or preschool.
- Expenses related to sending a child to a before or after school program while the taxpayer is at work.
- Day camp, even if it specialized in a particular activity, such as soccer.
- Qualifying care expenses do not include:
- Amounts paid for education (school tuition at the kindergarten level and above).
- Expenses paid by, or reimbursed through, a subsidy program.
- Child support payments.
- Overnight camp expenses.
- The taxpayer (and spouse/RDP) must have earned income, be a full-time student, or be disabled during the year
- Earned income includes wages, salary, tips, active duty pay, or net earnings from self-employment income.
- Earned income does not include pensions, social security payments, worker’s compensation, interest, dividends, capital gains, unemployment compensation, or public assistance.
- If the taxpayer's spouse/RDP was a full time student or disabled, see page 4 of the instructions for Form 3506, Part III, line 5.
- The taxpayer and the qualifying person(s) must live in the same home for more than half the year.
- If the qualifying person lived with more than one person during the year, see the “Tie-Breaker Rules” table on page 1 of Form 3506 instructions.
- When parents file separate returns, only one parent can claim the CDC credit, even if both parents paid for child care. See the rules on pages 1 and 2 of the Form 3506 instructions for rules for divorced, RDP terminated, separated, or never-married parents.
- The care provider cannot be the taxpayer’s spouse/RDP, parent of the qualifying child, or a person for whom the taxpayer can claim a dependent exemption.
- If the taxpayer’s child provided the care, the child must have been age 19 or older by the end of 2011.
- All required information about the care provider(s) and the qualifying person(s) must be provided on Form 3506. Incomplete information may cause delay or disallowance.
- The physical address (street address, city, state, and zip code) where the care was provided must be entered. Post office box addresses are not acceptable.
- The taxpayer’s federal adjusted income must be $100,000 or less.
Some More Ways to Help Prevent Reduction or Disallowance of the CDC Credit
We routinely audit CDC credit claims to verify the information provided on Form 3506 and the taxpayer's entitlement to the CDC credit. During this audit, the taxpayer may be asked to produce evidence to prove entitlement to the credit. We may also contact the care provider to verify the information provided. The following tips can help prevent a reduction or disallowance of the taxpayer's CDC credit:
- We recommend that taxpayers maintain accurate records which include identity records for the care provider (e.g. copies of driver's license and social security card), identity records for the qualifying persons (e.g. copies of birth certificate and social security card), and proof of payment for the care expenses (e.g. copies of canceled checks/money orders). Taxpayers should retain their records for at least seven years.
- Ensure that the contact information provided for the care provider on Form 3506 is accurate and up-to-date.