Many parents utilize day care so they can work or look for work. If this applies to you, your costs may qualify for a federal tax credit or may be utilized in a dependent care flex spending account through your employer.
Here are some things to know about the Child and Dependent Care Credit:
About the Credit
1. Care for Qualifying Persons – Your expenses must be for the care of one or more qualifying persons. Your dependent child(ren) under age 13 generally qualify.
2. Work-related Expenses – Your expenses for care must be work-related. In other words, you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return (see next step for exceptions).
3. Earned Income Required – You must have earned income. Earned income includes wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care.
4. Joint Return if Married – Generally, married couples must file a joint return. You can still take the credit, however, if you are legally separated or living apart from your spouse.
5. Type of Care – You may qualify for the credit whether you pay for care at home, at a daycare facility or at a day camp.
6. Credit Amount – The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on your income.
7. Expense Limits – The total expense that you can use in a year is limited. The current limit is $3,000 for one qualifying person or $6,000 for two or more.
8. Certain Care Does Not Qualify – You may not include the cost of certain types of care for the tax credit, including:
- Overnight camps or summer school tutoring costs.
- Care provided by your spouse or your child who is under age 19 at the end of the year.
- Care given by a person you can claim as your dependent.
Keep all your receipts and records for when you file taxes next year. You will need the name, address and taxpayer identification number of the care provider.You must report this information when you claim the credit on Form 2441, Child and Dependent Care Expenses.
Flex Spending Account at Work
Special rules apply if you enroll in dependent care benefits from your employer. The limit on this type of account through work is currently $5,000 per family and is often a more tax-efficient way to pay for child care. Be cautious – these plans are designed as a “use it or lose it” account. If your daycare costs might be below $5,000 per year; budgeting account contributions is critical.
Consult your tax advisor for the plan that makes the most sense to your situation.