Rules for the child care tax credit
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Dear Tax Talk,
Is my family eligible for a federal tax credit for child care expenses if it is a relative who is providing the care and we are paying the person by personal check?
You may be able to claim a credit if you pay someone to care for your dependent who is under age 13 or who is not able to care for himself or herself. To qualify, you must pay these expenses so you can work or look for work. If you’re married, both spouses must work or attend school to qualify for the credit.
You can count payments you make to relatives who are not your dependents, even if they live in your home.
Among other things, to qualify for the credit, you must identify the child care provider on your tax return. Identifying a relative on your tax return means disclosing his or her name, address and Social Security number. Presumably the IRS uses this information to verify that the provider is reporting the corresponding income on his or her tax return.
If you pay someone to come to your home and care for your child, you may be considered a household employer who has to pay employment taxes. Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business.
What this means is that either you or the provider will have to pay employment taxes of about 15 percent if you want to claim the credit. Because the child care credit can be as little as 20 percent of the amount paid depending on your adjusted gross income, many individuals in these circumstances forgo claiming the tax credit.
IRS Publication 503 spells out the rules for claiming the child care credit. Use Form 2441 to claim the credit.
Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.