Do You Qualify For Child Care Tax Credit?

Saratoga Tax Lawyers Ainer & Fraker, LLP

Do You Qualify for Child Care Tax Credits?

Many parents who work or are looking for work must arrange for care of their children during the school vacation. If you are one of those, and your children requiring care are under 13 years of age, you may qualify for a child care tax credit.

The credit ranges from 20% to 35% (the IRS provides a table) of non-reimbursed expenses based upon your income, with the higher percentages applying to lower income taxpayers and the lower percentages applying to higher income taxpayers. As example, if your income (AGI) is below $15,000, the credit percentage is 35% and gradually reduces as your income increases, until it caps out at 20% for incomes above $43,000. The maximum expense amout allowed is $3,000 for one child and $6,000 for two or more. The credit is non-refundable, which means it can only reduce your tax to zero and the excess is lost.

The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent to qualify to claim the credit (but there’s an exception for divorced or separated parents).

Click the following link for further information on The Child and Dependent Care Credit.

Non-Monetary Contributions

When you give away household items like clothing, appliances and other goods to a qualified charity, your generosity can add up to a tax write-off if you itemize your deductions.

Ainer & Fraker, LLP confirms that the amount of your deduction is generally the donated property’s “fair market value” (i.e., the price similar property would sell for in the open market).

Unfortunately, one of the most difficult problems connected with noncash donations is determining their FMV. In fact, when you give away property of high value, the job of determining worth is best left in the hands of a professional appraiser. Or, when you donate property that has increased in value, special tax rules apply and you should consult with an attorney before you make your donation.

The guidelines offered below are provided as aids for setting value on the most common type of noncash donations (miscellaneous personal items) that have decreased in value since the time they were first acquired:

  • Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the fair market value of used clothing and other personal items is usually much less than what you paid for them. A visit to a local thrift shop may help give you an idea of current selling prices for items like yours.
  • Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. If the property is worn, inoperable or out of style, it may have little or no market value. However, photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation.
  • Cars and Other Vehicles: Congress imposed some tough rules that substantially limit the deduction for this popular charitable donation.

For more information, be sure to click the following link for more on Record Keeping and Reporting of Non-Cash donations.

What in the World is a FLIP-CRUT?

Recently, I was working with a client to design a Charitable Remainder Trust to which he could donate his $3.2 million real property.

During the meeting, he expressed his desire not to sell the property inside the Charitable Remainder Trust until the second or third year after contribution.

At which point, I asked him: “Have you ever considered a FLIP-CRUT?”

To which he remarked: “What in the world is a FLIP-CRUT?”

To which I responded:  “It’s a special type of Charitable Remainder Trust, allowing you to defer the annual income payout until after the real property sells.”

Here’s how it works.

Normally, a Charitable Remainder Trust is required to distribute either a fixed percentage (unitrust) or fixed payment amount (annuity) to the Donor, no less than annually.

But what if the Trust doesn’t have assets that are capable of generating that amount each year?

The answer is to begin with a Net Income Charitable Remainder Trust, with provisions allowing it to convert (or FLIP) to a Standard Charitable Remainder Trust on some future event.

During the initial period, the CRT will distribute the lesser of Net Income or the Unitrust amount.  If there is no Net Income, then the amount distributed that year will be zero.

Upon the occurrence of a “Triggering Event”, the Trust then converts to a Standard CRT, and distributes the initially defined percentage.

In this client’s example, he contributed a $3.2 million piece of real property, into an 8%, 12 year FLIP-CRT.

During the initial period, before the sale of the real property, the net income will be zero.

However, upon the occurrence of the Triggering Event – in this case the sale of the real property – the CRT begins it’s annual 8% unitrust distribution to the Donor.

There are a couple of important rules to the use of a FLIP-CRUT:

(1) The “triggering event” may not be a factor “under the control” of the Donor.  Oddly enough, however, the sale of real property is not deemed to be “under the control” of the Donor.

(2) The Donor may also be the Trustee of the CRT in certain cases.  However, if difficult to value assets are contributed – such as real property, partnership interests…basically anything other than cash or publicly traded securities – than an outside Special Independent Trustee will be required to handle those transactions.

CONCLUSION: The FLIP-CRUT is an ideal vehicle when you wish to transfer Unmarketable Assets – or those that may not immediately produce income – to a Charitable Remainder Trust.  You can still enjoy the substantial tax benefits of a CRT, while not being forced to distribute Income until it is available.