Child care can undoubtedly prove to be a costly expense for any taxpayer. In some instances, taxpayers must weigh whether the cost of child care is a deterrent to returning, or, in some cases, entering the workforce. Although the IRS may not be able to control market prices of child care options, it does offer a credit that can lessen the burden that child care costs may have on the budget of working parents.
The IRS offers what is known as a child care credit, which is a tax break for working parents. The credit, in effect, returns a portion of the money that a taxpayer spends on child care, which can then lead to a reduction in overall tax liability by hundreds or thousands of dollars, circumstances depending. Unlike many other tax breaks that have income limits, a taxpayer may claim the child care credit regardless of income, although the credit decreases as income levels increase.
Generally, in order to qualify for the child care credit, an individual, or his or her spouse, must:
- Have a child that meets certain qualifications;
- Have earned income that came from employment or self-employment, unless a full-time student or disabled individual;
- Have a filing status that is single, married filing jointly, head of household, or qualifying widow(er) with a dependent child; and
- Have paid for child care from a provider who meets certain qualifications.
There are many nuances to the list of requirements for the credit. Any taxpayer who considers claiming the credit should take stock and ensure they meet the requirements.
Determining the amount of the credit
The amount of the child care credit that a taxpayer is entitled to is based on both a taxpayer’s income as well as the amount that a taxpayer paid in child care for the tax year. That is, the amount of the credit is determined based on a percentage of the employment-related expenses paid by the taxpayer during the tax year. Such expenses are subject to the earned income limit, as well as the dollar limit. In addition, the credit percentage is based on the taxpayer’s adjusted gross income. As the credit is nonrefundable, the credit is limited to the amount of your tax liability.
A taxpayer is to add the total for care expenses that qualify for the credit. The maximum that a taxpayer may claim for care expenses is $3,000 for one qualifying child, or $6,000 for one or more qualifying children. The taxpayer is to then subtract any money provided by an employer for child care expenses.
The credit that a taxpayer can claim is a percentage of the allowable expenses based on the taxpayer’s adjusted gross income. The IRS provides a chart to help determine the percentage. The percentage may fall between 20 percent and 35 percent. Thus, for purposes of calculating the federal tax credit for child and dependent care: maximum work-related expenses of $3,000 ($6,000 if 2 or more qualifying individuals) × applicable percentage (35% if AGI of $15,000 or less; percentage reduced 1% for each $2,000 of AGI over $15,000; 20% if AGI of $43,000 or more). Maximum credit: $1,050 ($2,100 for 2 or more).
For guidance on tax credits and deductions, contact your Grossman St. Amour CPAs tax professional at 315.422.1391.