Dependent Care Deduction

Overview

Allow a dependent care deduction when the cost of school-related dependent care exceeds the net nonexempt student income available to meet that cost.

Base the dependent care deduction on the highest of the following amounts:

  • Dependent care listed on the Standard Student Budget
  • Dependent care cost earmarked by the grantor of student financial aid
  • Actual verified dependent care costs for the school or training period.

Subtract all exempt educational expenses except dependent care (tuition, fees, etc.) from nonexempt student income. Then, subtract the remaining nonexempt student income from the highest dependent care cost. The balance is allowable as a dependent care deduction.

The sum of the income exemption plus the income deduction allowed for dependent care may not exceed the highest of the following amounts:

  • Dependent care listed on the Standard Student Budget
  • Dependent care cost earmarked by the grantor of student financial aid
  • Actual verified dependent care costs for the school or training period.

ExampleExample

$1000 nonexempt student income after subtracting all exemptions except dependent care

Dependent care: $1800 earmarked
$1000 Standard Student Budget
$1200 actual verified cost

$1800 dependent care cost (the highest of the three amounts)
-1000 remaining nonexempt student income
$800 excess dependent care cost

The $1800 dependent care cost exceeds the remaining nonexempt student income. The remaining $1000 income is exempt to meet that part of the dependent care cost. The $800 dependent care not covered by the student income is allowable as a deduction. Prorate it across the period it is intended to cover, and add any work-related dependent care cost.

Procedure

Follow the steps below to determine when and how to allow a deduction for school-related dependent care costs.

  1. Use the HIGHEST of the following school-related dependent care costs:
    1. The amount listed on the Standard Student Budget, or
    2. The amount earmarked by the grantor, or
    3. The verified actual cost anticipated for the school year.
  2. Determine the amount of:
    1. The net nonexempt student income, plus
    2. The amount of the dependent care EXEMPTION used to compute that income.
  3. Subtract the STEP 2 total from the highest dependent care amount in STEP 1.
    1. IF THE REMAINDER IS Zero or less, then Nonexempt student income plus the dependent care exemption are sufficient to cover the cost of dependent care.
      1. No deduction is allowed for school-related dependent care.
    2. If the remainder is More than zero, then 
      1. The household is entitled to a deduction for school-related dependent care:
      2. Prorate by dividing the STEP 3 remainder by the number of months in the school period.
      3. Add the prorated monthly amount to any work-related dependent care cost each month.

Deduction Allowed

ExampleExample

Dependent care is more than net nonexempt income plus the dependent care exemption amount.

A student has $5400 in nonexempt student income. After applying all exempt expenses including dependent care, $1000 is left as net nonexempt income.

The Standard Student Budget allows $1000 for dependent care costs. The financial aid award notice earmarks $900. $1000, the higher amount is used for the dependent care exemption.

The student will pay $300 mo. each month of the school year (ten months) for child care. Verification of the first month's child care is provided.

No Deduction Allowed

ExampleExample

Dependent care is equal to or less than net nonexempt income plus the dependent care exemption amount.

A student is awarded a $6000 nonexempt grant. After applying all exempt expenses other than dependent care, $2200 is left as net nonexempt income.

$2000 is earmarked for dependent care, and $1800 is listed on the Standard Student Budget. $2000 was used as a dependent care exemption.

Actual dependent care cost is not expected to exceed either of these amounts. Therefore, verification of the actual cost is not required.

Related Topics

Students