If you work full-time and your kids get out of school in the middle of the afternoon, you might need to keep them in an after-school program until you can pick them up. During summer, when your kids are free but you are not, finding child care for full days can be an even greater challenge.
The IRS can’t help you find after-school care or a summertime daycare provider, but it can help pay some of the costs, thanks to the child and dependent care tax credit.
And day camp, a popular summer activity, can count toward that tax credit claim.
The tax break’s name offers two important pieces of information. First, since it’s a credit, it offers dollar-for-dollar tax savings. Second, it can be used to pay for care costs of other dependents, such as an aging parent.
But, as with most tax provisions, there are limits — on what you spend, as well as how much you earn — that reduce the actual amount of the credit. Plus, you must make sure you and the person being cared for meet IRS eligibility guidelines.
In addition to summer day camp, here are some care services that are eligible for the credit.
Care services eligible for credit
- Private home nurses.
- Licensed dependent-care centers.
- Nursery school and kindergarten costs: In these cases, if the costs of school are separate from child-care expenses, only the child-care portion qualifies.
- Household help, as long as the services are necessary for the well-being and protection of the qualifying individual.
Actual care cost limits
The first thing to keep in mind is that the credit probably will not pay for all of your child-care costs. The IRS limits the dollar amount you can claim and you only get to count a percentage of that amount.
You can claim only up to $3,000 for the care of one person and $6,000 for two or more. Then this amount is further reduced based on your overall income (more on this later).
There is some good news, however. If you paid someone to watch over your two (or more) kids, you can combine all your care costs to reach the $6,000 limit.
For instance, the parents of Janie and Jimmy could count the $2,800 for Janie’s care and $3,200 for Jimmy’s in order to claim a total of $6,000, instead of only $5,800 by adding $2,800 plus $3,000. By using the total amount rather than splitting the actual costs and then applying the limits and figuring the credit, they’ll get a larger tax break.
The second limit is the percentage of costs that you can claim. Once you determine your allowable expense amount, your actual credit is limited to a percentage of that figure.
So, regardless of how much you pay, the potential maximum child- and dependent-care credit is $1,050 (35 percent of $3,000) for the care of one person, twice that for two or more. Depending upon your income, the percentage range drops from 35 percent to 20 percent of your allowable care costs.
The 35 percent rate is only for lower-income taxpayers. If you make more than $15,000, the credit percentage is incrementally phased down by salary range until it hits 20 percent for those earning more than $43,000.
And even if your care costs come up to the maximum credit amount, you may not get it all if your tax bill is less than your allowable credit. The dependent-care credit is not refundable, meaning it can only take your tax bill to zero. Any excess credit is not usable.
For example, if you claim a $1,050 maximum credit for the care of one child and owe $750, the IRS will use your credit to wipe out your tax bill, but you won’t get the extra $300 as a refund.
If you pay for child care, you can claim this credit to help offset some of your costs as long as your child meets IRS guidelines.
The youngster must be younger than 13. He or she also must meet IRS’ dependent requirements. Basically, this means the child must be related to you and live with you most of the time. There are exceptions in the cases of divorced or separated parents, so read the tax-filing instructions carefully or consult your tax adviser if this is your situation.
But the child- and dependent-care credit is not limited to child-care costs. It also can be claimed when you pay for care of other dependents, as they are deemed qualified by the IRS. For example, if you pay someone to look after your spouse or a dependent of any age who is incapacitated because of physical or mental limitations, you might be eligible for this tax break.
Only working taxpayers need apply
Then there’s the credit’s job catch. You can only claim dependent care that was necessary so that you could go to or look for work.
If you’re married, the IRS requires both of you to be employed or seeking a job. The only exception is when one spouse is either a full-time student or is physically or mentally incapable of self-care.
After clearing the employment hurdle, other requirements to claim the credit include:
- A filing status of single, head of household, married filing jointly or qualifying widow or widower with a dependent child. In most cases, married taxpayers who file separate returns cannot claim the dependent-care credit.
- The payments for care cannot be made to someone you can claim as your dependent on your return, or to your child who is younger than age 19.
To claim child- and dependent-care credit, complete and attach Form 2441 to your return.
Identify your caregivers
You also must include on the tax forms the name, address and taxpayer identification numbers of the caregivers.
If it’s a business, the operator can provide you with the employer identification number. You also can use Form W-10, Dependent Care Provider’s Identification and Certification, to request this information from the care provider. For individual providers, you generally use the person’s Social Security number.
You might have some additional filing duties related to this credit depending on whom you hire and how you cover the costs.
If you pay someone to come to your home to provide the care, you may be considered a household employer and have to pay employment taxes.
And while you feel most comfortable when a member of your family is taking care of your children, you cannot claim the credit if the caregiver is your spouse or, as mentioned, one of your teenage children.
Company benefit considerations
Finally, if you received any dependent-care benefits from your employer during the year, you will have to complete Part III of Form 2441 to determine the amount of your credit. These amounts are listed in box 10 of your W-2.
Company benefits include money you receive directly from your employer or that was paid by your employer to your care provider. The fair market value of a company-provided day care facility also counts, as does money you put into a dependent-care flexible spending account, or FSA, to pay care expenses.
For example, if your company provides untaxed dependent-care benefits directly to you, those amounts reduce the amount of expenses you can claim. If the company pays you $1,000 for child-care costs, you must reduce your credit amount by that payment, so a $3,000 limit now becomes $2,000 to offset the company payments.
In the case of a spending account, if you paid $10,000 for a nursery school to look after your two children while you were at work, $6,000 is the maximum allowable credit amount. But you used $5,000 from your workplace FSA to pay part of those costs, so the account money will reduce how much you can claim toward the child care credit — the $6,000 maximum care expense amount is cut to $1,000.
In both of these instances, because the workplace child-care assistance is not taxable income to you, you cannot use those amounts to help further cut your tax bill.
Some companies also offer a Section 125 cafeteria plan to their employees, points out Judy O’Connor, a certified public accountant with O’Connor & Rodriguez, P.A., in Miami Shores. In these plans, “the employee can elect to have pretax dollars put into an account for medical care reimbursement, dependent care assistance and other expenses allowed by the plan,” she says. “The beauty of these accounts is that if the employee is in a 25 percent tax bracket and utilizes the account, then that is their tax savings.”
Employees can save up to $5,000 for daycare, she adds, “so the employee can determine if it is better to use pretax dollars or claim the credit on Form 2441.”
More information on the credit is available in IRS Publication 503, Child and Dependent Care Expenses, or IRS Publication 17, Your Federal Income Tax.