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New refundable credit for child, dependent care expenses

Volume 00-1 January/February 2001

Continued from page 1

TAX NEWS is a bimonthly publication of the Communications Services Bureau, California Franchise Tax Board. Its primary objective is to provide information to income tax practitioners about state income tax laws, regulations, policies and procedures.
Members of the Board:
Kathleen Connell, Chair
 State Controller

Claude Parrish Chair,
 State Board of Equalization

B. Timothy Gage
Director, Department of Finance
Executive Officer:
Gerald H. Goldberg
Editor: Marvin Meek
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If the California AGI is more than $40,000 but not more than $70,000, the percentage is 53 percent.

If the California AGI is more than $70,000 but not more than $100,000, the percentage is 42 percent.

Taxpayers with California AGI over $100,000 are not eligible for the credit.

The credit may be claimed on California Forms 540, 540A, 540NR and 540X. It cannot be claimed on Form 540 2EZ.

To claim the credit, taxpayers must first calculate the allowable federal credit by completing either IRS Schedule 2441 for 1040 filers or IRS Schedule 2 for 1040A filers.

If you have clients who did not file a federal return or claim the federal credit, they can still claim the credit for California. First complete the federal Form 2441 (or federal Schedule 2 if your client filed form 1040A) to determine how much the federal credit would have been. Then follow the instructions provided with the California return to claim the credit.

To avoid delays in processing or denial of this credit, advise your clients to attach their completed federal schedule to their California return and to provide the following information:

· Federal Child and Dependent Care Expenses Form 2441 (Use federal Schedule 2 if you filed Form 1040A);

· social security number of each qualifying person; and

· name, address and taxpayer identification number (social security number or federal employer identification number) of the care provider. Note: If your client claims more than two qualifying individuals, add a statement to the return with the required information.

If we do not receive this information, we must deny the credit.

If a claim for the credit is denied, in certain situations we will allow the taxpayer 60 days to protest. Some of your clients could possibly receive a second billing before the 60-day protest period is past. If this happens, encourage them to respond as quickly as possible if they feel we have erroneously denied or reduced their credit.

This credit does not apply to all child care expenses. There are a number of tests and limits related to this credit, including:

• Qualifying Person Test;
• Keeping Up a Home Test;
• Earned Income Test;
• Work-Related Expense Test;
• Joint Return Test;
• Provider Identification Test;
• Earned Income Limit, and;
• Dollar Limit.

Please see IRS Publication 503 for details.

January/February 2001

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