What Are the Tax Rules Around Day Care

You may be in for a tax break if you’ve been shelling out the bucks for day care. Among the tax credits and deductions available to parents and families, one of the most overlooked and beneficial is the childcare tax credit, formally known as the Child and Dependent Care Expenses Tax Credit and claimed with IRS Form 2441.

The credit is geared toward working parents or guardians, but if you’ve been a full-time student or were unemployed for part of the year, you may also qualify. If your family has never taken advantage of this tax break, it could be a game-changer when you file your taxes.

Current limits are up to $3,000 of qualifying expenses for a maximum credit of $1,050 for one child or dependent or up to $6,000 of qualifying expenses for a maximum credit of $2,100 for two or more children or dependents. The credit varies depending on your earned income and is based on the expenses you paid to provide childcare. Your federal income taxes will be reduced, thus increasing your refund. This will free up money for the other expenses in raising a child.

Who gets it?

To qualify, you must be the custodial parent or main caretaker of the child or dependent and:

  • The day care must have been used so that you could work or look for employment.
  • Your filing status must be single, head of household, qualifying widow or widower with a qualifying child, or married filing jointly.
  • The childcare provider cannot be your spouse or dependent or the child’s parent.

And what about qualifying expenses?

  • Childcare provided by a babysitter or licensed dependent care center.
  • The cost of a cook, housekeeper, or cleaning person who provides care for the child or dependent.
  • Day camp or summer camp fees, even for camps centered around a sport or activity, qualify if the camp was selected to provide care while the parent or parents were at work. Overnight camps do not qualify.
  • Costs related to before- or after-school care for children under 13.
  • Costs related to a nurse, home care provider, or other care provider for a disabled dependent.

Expenses related to schooling or tutoring do not qualify. The IRS has a series of exceptions to the rules in the qualification process meant to allow a greater number of families to take advantage of the credit.

  • For divorced or separated parents, the custodial parent can claim the credit even if the other parent has the right to claim the child as a dependent due to the divorce or separation agreement.
  • You can take the credit for the care of disabled adults even if you cannot claim them as dependents because they have too much gross income or because you or your spouse can be claimed as a dependent by someone else.
  • If your spouse is a disabled adult, the IRS waives the requirement for him/her to have earned income.
  • If your spouse was a full-time student who attended college for at least five months out of the tax year, the IRS considers him/her to have earned income for each month s/he was a full-time student.

Consider your options

Millions of families use day care and childcare services, which can get pricey. While claiming day care expenses toward a tax credit won’t defray all the costs associated with childcare, it can reduce them significantly.

It may be worthwhile to consider other options too. Employer-sponsored dependent care flexible spending accounts allow you to divert pre-tax money from your salary to an account for qualified care expenses.

Since the contributions are tax-advantaged, you’ll lower your taxable income by the amount you contribute, meaning more tax savings than taking the childcare and dependent care credit alone. But if you take advantage of the dependent care flexible spending account and the childcare and dependent care credit, you can’t double dip, claiming the same expenses for both benefits.

As you can see, the rules are complex, and the amounts tend to change from year to year. If you’re unsure about your specific situation, check with your R&A advisor.

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