Employed persons must sometimes incur expenses for child care while working away from home. The cost can become significant, whether incurred throughout the entire year or just during the summer. Fortunately, a tax credit is available to offset the cost of care for children under age 13.
The tax benefit is referred to as the child and dependent care credit, since expenses for some dependents other than children also qualify. Even expenses for the care of a spouse may qualify in certain situations. A percentage of the costs incurred is used as a credit to reduce the amount of tax otherwise payable.
For one child, up to $3,000 in expenses can be used as the basis for the credit. For two dependents, the allowable amount is doubled to $6,000. Depending on your income level, a percentage ranging from 20 percent to 35 percent is multiplied against the allowable expense to calculate the credit.
The one or two persons listed for the credit must live in the same household with you. The relationships qualifying for the credit include:
The care does not necessarily have to be performed outside of your home. In the case of a disabled child or spouse, care can be provided within the home while you are away at work. The credit does not include costs incurred for education or transportation.
The credit is limited to the amount of your earnings, but a full-time student qualifies for an exception. A full-time student with one child automatically reports $250 per month as earnings. With two dependents, the full-time student reports $500 as monthly earnings for purposes of calculating the credit limitation.
The $6,000 actual expense limitation for two dependents does not limit each one to $3,000. An overall $6,000 limitation is reached by simply having two qualifying persons. You might have no expenses for one child, yet you can include up to $6,000 in expenses for the second child.
Your child care provider should provide you with their own general statement at the end of the year to summarize your payments. The statement is used to complete IRS Form 2441, which supports the credit included on Form 1040. The credit is not refundable, so it is limited to the amount of tax on taxable income.
Some states also allow a smaller child care credit on state tax returns, essentially for the same expenses. Contact an income tax preparation specialist, such as someone from Wasserman Accountancy Corporation, for more advice or to ask any further questions about your personal taxes.
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