Childcare is expensive. And if someone has to give up work in order to stay home with the kids, it can be even more expensive.
So to help offset that — the US tax code includes a “Child and Dependent Care Credit”. It provides a tax break intended specifically to help working parents and/or guardians (or taxpayers who were full-time students or unemployed for part of the year, too) — to help those taxpayers more easily afford to be able to work, study, or look for work.
It’s available to assist in costs for caring for either a child or a disabled dependent.
The amount of the credit varies, and it depends on both the expenses paid for care and the taxpayers earned income.
And – this is huge – it doesn’t apply to what you pay for daycare, but it also may apply to childcare provided by a babysitter, housekeeper or other household employee (i.e., a nanny — remember to pay “nanny taxes”!). Additionally, other forms of daytime child care may be allowed including summer day camps (but not overnight camps), after-school care/programs, etc. Again, this is specifically intended to help you afford to work and after-school care or daytime summer camps do allow parents to do that.
In order to qualify for this credit, you must meet the following criteria:
- You (and spouse) must have earned income for the year — it is intended to help people work. The service providing care has to be being used in order to allow you to work (or study or look for employment).
- You must be the custodial parent or primary caretaker for the child or dependent person.
- The child or dependent met be under 13 or must be disabled and incapable of taking care of him or herself
- The care provider must not be your spouse or a dependent or the child’s parent. (but it can be someone related to you who you pay).
- You must provide the name, address, and Taxpayer Identification Number (TIN) of the person who provided the care. (If it was an individual, the TIN may be their Social Security Number). Make sure to get this information along with receipts for when you paid for the care.
Note, again, that a full-time student — as far as the IRS is concerned for this tax credit — counts as employed during each month he or she is a full-time student if they were full-time students for at least 5 months of the tax year.
The size of the tax credit is based on how much you spend on care, as well as your income. We strongly recommend working with an accountant (or at least using tax-preparation software) to compute this. The basic working of it that you add up all the expenses you’re allowed to claim, and then you get a credit equal to some percentage of that total, where the percentage used to compute this is based on your income.
- The maximum amount of covered care that you’re allowed to use to compute the credit is $3000 for one Child, or $6000 for two or more.
- If your employer gave you money to use on a pre-tax basis (such as a dependent care account) — any payment used from that account must be subtracted from the sum of expenses you paid.
- The actual amount of expenses used to compute your credit is the lesser of (either $3000 or $6000), or the actual expenses paid, or the lesser of either you or your spouse’s earned income). It will never be more than $3000 or $6000, but it may be less.
- Look up your Adjusted Gross Income (AGI) from your main tax form (on the 2016 1040, for example, it was the bottom line of page 1, line number 37 — which is also the top line on page 2, line 38).
- You will be filling in IRS form 2441, and that form has a lookup table indicating what percent of the expenses will be allowed as a credit. It will be somewhere between 35% (for folks with income below $15,000) and 20% for folks with income above $43,000. (Thresholds, again, from 2016).
- Your credit will be the lesser of either what you just computed — or your actual tax liability. (i.e., you cannot get a credit bigger than the taxes you owed, since the credit is non-refundable).
Again — we strongly urge you to work with a tax professional in order to get this right.
However, whether you work with a professional or not — you are responsible for having the documentation. This means:
- Keep records!
- You will need receipts indicating the amount paid for the care and for when the care was provided
- You will need the name, address, and TIN of the provider.
Remember, this is just for educational purposes, and is not specific tax or investment advice. We recommend working with a professional tax preparer (EA or CPA) and consulting with a financial advisor (such as a fee-only financial planner) to assess how this all might fit into your own personal situation.