Final regs. on dependent care expenses.

• Author: Nevius, Alistair M.

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 between 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 expense, even if the parents work at night.

The final regulations state that the additional...