Child care expenses can eat up a huge part of a working parent’s budget. A 2012 report titled “Parents and the High Cost of Child Care” found the average annual cost of full-time child care for an infant ranged from $4,600 in Mississippi to nearly $15,000 in Massachusetts. The study also found the average cost of center-based infant care was higher than the annual median rent in 22 states and higher than a mortgage payment in 20 states. That’s right – many parents are paying more for child care than they are for housing.
The cost of child care in the United States is largely carried by parents. In general, there is no public financing or other system to help make child care more affordable for working families. The federal government does provide grants to states to subsidize the cost for low-income families, but not every eligible child receives assistance and there are still millions of families who struggle to keep up with these costs. Some employers also offer Flexible Spending Accounts (FSAs) to help reduce a parent’s taxable income, as well as pay for child care, but not every worker is entitled to this benefit.
There is one way the majority of working families can ease the burden of child care costs: The child and dependent care tax credit. This tax credit can help lessen the income tax burden of millions of working American parents and offset some of the costs associated with child care.
Guide to Claiming the Child and Dependent Care Tax Credit
The child and dependent care tax credit most likely will not cover all child care expenses, but it certainly helps. As with any tax benefit, there are strict guidelines taxpayers must follow in order to claim the credit when filing your taxes, which can lead to a lot of confusion and missed opportunity. If you aren’t sure if you qualify for this cost-saving tax credit, here are 20 facts about the child and dependent care tax credit to help you better understand this benefit.
1. Parents must work to claim child care credit
The care must have been provided so you, and your spouse if you are married filing jointly, could work or look for work.
2. Credit is a percentage of child or dependent care costs
You can claim up to $3,000 spent on care provided for one qualifying individual, or up to $6,000 for two or more qualifying individuals.
3. The child and dependent care tax credit counts against tax owed
Depending on your income level, a percentage of your child care costs up to those $3,000 or $6,000 thresholds will count against the tax you owe. This amount will be subtracted from your tax burden as a tax credit.
4. Tax credit starts at 35% for lower-income filers
For tax filers with incomes of $15,000 or less, the credit is 35% of the child-care expenses up to $3,000 per dependent (up to $6,000 for multiple dependents). For these filers, the tax credit maxes out at $1,050 for one qualifying child or $2,100 for two or more.
5. Minimum percentage paid is 20% of child care expenses
If you earn more than $15,000, the credit drops by 1 percentage point for every $2,000 on income, reaching a minimum of 20% for those who earn a gross adjusted income of $43,000 or more. Those making $43,000 or more would qualify for a $600 tax credit for one child when the full $3,000 care expense is claimed.
6. Care for children 12 years and under qualifies for credit
The qualifying dependent must be 12-years old or under when the care is provided.
7. Spouses and dependents incapable of self-care qualify as well
A qualifying dependent can also be a spouse or other individual 13 and over who is physically or mentally incapable of self-care.
8. The child or dependent must live with you
You cannot claim the child and dependent care tax credit for child care or dependent expenses for someone who does not live with you. The qualifying person must have lived with you for more than half the year, but there are exceptions in the event of birth or death and divorced or separated parents.
9. The care provider may not be your dependent
The person who provides the child care or adult care cannot be your dependent, meaning if you pay a spouse or dependent child to be your care provider those expenses would not qualify for the tax credit.
10. File IRS Form 2441 to claim the care tax credit
You need to fill out IRS form 2441 and file it with your tax return to claim the child and dependent care tax credit.
11. Be ready to supply care provider information
You must provide the name, address and Social Security number or Employer Identification Number of each qualifying provider when filing to claim this credit.
12. An EIN is not required for tax-exempt care providers
If a tax-exempt organization provides care for your child, just write “tax exempt” in the box that asks for an EIN.
13. Reimbursements for care can’t be claimed
If you get partial or full reimbursement of child care from a state agency or other source, like an employer, you must deduct the reimbursement and only claim the credit on the net amount you paid.
14. Only income earners qualify for the credit
You and your spouse must have earned income to qualify for the credit. A spouse can be considered as having income for the purposes of the credit under two exceptions: if he is a full-time student or physically or mentally unable to care for himself.
15. In-home care might make you a household employer
If you pay someone to come to your home and provide care, as with a nanny or at-home nurse, you might be considered a household employer and be required to pay employment taxes.
16. Babysitting and overnight camps don’t count
The care does not qualify if it was used for off-hours babysitting or for personal reasons. Overnight camps also don’t qualify for the credit.
17. Day camp, after-school care and other supervised programs do
The expenses for some day camps, after-school classes and other supervised programs qualify for the tax credit.
18. Only the custodial parent claims the credit after divorce
In a divorce, only the custodial parent can claim the credit. The noncustodial parent cannot, even if they would otherwise qualify to claim the child as a dependent.
19. The child and dependent care tax credit is non-refundable
The child and dependent tax credit is not refundable, meaning it can only reduce your tax bill to zero and you can’t get a refund on any excess credit. So, if you owe $500 on your taxes and qualified for a child care or dependent tax credit of $600, your tax bill would only be reduced to zero. You won’t get a refund for the remaining $100.
20. You can’t claim the tax credit if married but filing separately
In most cases, married taxpayers who file separate returns cannot claim the dependent care tax credit. You must file as single, head of household, married filing jointly or qualifying widow or widower with a dependent child.
Fanning Law, LLC Can Help
The facts of each case are unique and the laws in each state are different. This article provides a brief, general introduction to the topic. It is not legal advice. For more information about your specific questions, contact Bill Fanning at Fanning Law, LLC - The Offices of William C. Fanning, Jr. - 301.934.3620 or at firstname.lastname@example.org.
Article courtesy of GO Banking Rates.com, written by Morgan Quinn February 11, 2015
Photo credit: U.S. Army