Final Regs. on Dependent Care Expenses

The Service has issued final regulations on the Sec. 21 credit for child and dependent expenses (TD 9354). The final regulations adopt, with changes, proposed regulations that were released in May 2006 (REG-139059-02). The final regulations apply to tax years ending after August 14, 2007.

Sec. 21 allows a credit for qualifying employment-related household and dependent care expenses that are paid to allow the taxpayer to be gainfully employed. The final regulations clarify the treatment of several types of costs, including costs of summer schools and camps, costs incurred during the taxpayer’s temporary absence from work, and costs of caregivers’ room and board.

Education costs do not qualify for the credit, but the regulations clarify that the full amount paid for a day camp or similar program qualifies even though the camp specializes in teaching a particular activity, such as soccer. For administrative convenience, no allocation is required in this situation be-tween the cost of care and amounts paid for learning the specialized skill. However, the regulations spell out that the costs of summer school and tutoring programs are not qualifying employment-related expenses because such programs provide education and not care.

The final regulations clarify that the Sec. 21(b)(2)(C) requirement that a dependent care center must comply with applicable state and local laws also applies to day camps. They also clarify that only day camps are eligible; no portion of the cost of an overnight camp is a qualifying employment-related ex-pense, even if the parents work at night.

The final regulations state that the additional cost of providing room and board for a caregiver over usual household expenses may be an employment-related expense and clarify that an increase in the cost of utilities attributable to providing room and board to a caregiver may also constitute a qualifying expense.

A taxpayer must generally allocate expenses between qualifying and nonqualifying costs on a daily basis during any period in which the taxpayer is employed only part of the time. However, the final regulations provide that if a taxpayer is absent from work for a short, temporary period, the costs of child or dependent care during that period can still qualify, as long as the caregiving arrangement requires the taxpayer to pay the costs during that period. The regulations create a safe harbor that treats an absence of no more than two consecutive calendar weeks as a short, temporary absence.

The regulations also explain that, for parents who work at night, the costs of overnight care and daycare—when one parent sleeps during the day—may be qualifying expenses.

Finally, the regulations make clear that the special dependency rule of 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.