Child and Dependent Care Credit Loop

[JakeG]

I am having the same issue described in this post.

Steps to reproduce the loop:

- click Review for the Dependent Care Credit deduction

- answer Yes for the question "Did you pay for child and dependent care in 2021?"

- answer Yes for the "principal place of residence in the U.S." question

- answer "None of the above" for both my spouse and I in the Tell Us More screen

This sends me back to the screen to click Review for the Dependent Care Credit deduction.

I believe we qualify as:

- My wife holds a W2 job - verified this W2 is assigned to my wife

- I am employed through one of my S-Corp and receive a W2 - verified this W2 is assigned to me

- My LLC taxed as an S-Corp generated about $45k in profits (received a 1120-S K-1).

- I have a second LLC for a new business venture that lost $64k (received a 1065 K-1).

- Combined, my wife and I earned under $400k.

- We are filing jointly.

I was wondering if my second LLC loss was causing this issue, so I removed it. After removing it, Turbotax allows me to claim the Dependent Care Credit.

Any help determining if there is a bug in TurboTax or if my second new business loss really does disqualify us for this deduction even though my primary business produced enough money (K-1 and W2) to cover the loss of my new business (K-1).

[JamesG1]

Each partner in a married filing jointly tax return must have positive earned income.  What are the numbers for your incomes and what is the nature of the income from the two businesses? 

I suspect that the LLC loss is reducing your individual earned income to $0 or less and disqualifying your tax return from claiming the Child and Dependent Care Credit.

IRS Form 2441 Instructions page 1 states:

Purpose of Form

You (and your spouse if filing jointly) must have earned income to take the credit or exclude dependent care benefits from your income.

[Edited 3/20/2022 6:31 AM PST]

@JakeG 

[JakeG]

Thank you for the response, @JamesG1.

My wife's job paid her just under 52k (W2).

My first LLC does consulting work and paid me just under 52k (W2), and generated 45k in profits (1120-S K-1).

My second LLC is creating a SaaS Web Application, I hired a team to help accelerate the development and promotion of it, hence a loss of 65k (1065 K-1).

Perhaps the first LLC's income taxed as an S-Corp does not qualify as earned income, but the second LLC taxed as a partnership does qualify as earned income (deficit)?

[AliciaP1]

You should check to see if your K-1 from your 1120S is marked as passive in error.  Passive income is not "earned" income for this credit.  If it is marked as passive, the Form 1065 loss is offsetting your W-2 earned income and denying the credit.

In your return, go to your K-1 for the S-Corp.  Click to Update it and progress through the questions until you get to the Did You Participate? screen and answer Yes.  Continue through the K-1 entry and verify your credit.

@JakeG

[JakeG]

Hello @AliciaP1 ,

The "Did You Participate?" screen was marked as Yes. I went through the K-1 details again and still receive the same result of not being able to complete the Dependent Care Credit section.

Any other ideas on what could be tripping this up? Based on your response, it seems there could be a bug in the software.

Best regards,

Jake

[AliciaP1]

It would be helpful to have a TurboTax ".tax2021" file that is experiencing this issue.

You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, here are the instructions: 

Go to the black panel on the left side of your program and select Tax Tools. 

1. Then select Tools below Tax Tools. 
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent. 
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 
5. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.

@JakeG

[JakeG]

Hello @AliciaP1,

Token number 965669 was generated using the instructions you provided. Please let me know if any additional information is needed.

Thank you,
Jake

[AliciaP1 · Accepted solution]

Your original assumption is correct.  The structure of your partnership loss, coded as Loss from Self-Employment, is eliminating your W-2 earned income and disqualifies you for the Dependent Care Credit.  

@JakeG

[tsandum]

I have run into a similar issue. 

I have w-2 earned income, but my wife is a full-time graduate student. 

My understanding is that being a full time student voids the requirement for both parties of the MFJ to have earned income. 

When I put in the amount of the expense for my 7 year old son and hit "continue", it takes me to a screen that says "you have not entered your dependent care expenses" and tells me to hit "back". I have repeated this several times with no change. What could be the hangup here?