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Claim a Tax Credit for Summer Daycare Expenses

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For harried parents, the definition of true panic is realizing in April that you forgot to enroll your kids for summer day camp and now all the slots are filled. Cut to: As the school year ends, you're feverishly trying to find adequate daycare because neither of you can take time off work to watch the kids.

I know of one such couple; with any luck you're more organized than they were. In fact, bonus points if you thought ahead and signed up during last fall's open enrollment for a dependent care flexible spending account (FSA), which allows you to pay for childcare using pretax dollars.

But if you didn't enroll in an FSA or your employer doesn't offer them, there's still a way to get a tax break on your summer daycare expenses (and other dependent care costs throughout the year): the Child and Dependent Care Credit. Here's how it works:

If you pay someone to care for your young child (or other qualifying dependents) so you can work -- or look for work -- you may be eligible for this tax credit worth up to 35 percent of those expenses. Because it's the IRS doling out the credit, there are a number of qualifying provisions:
  • Typically the dependent must be a child in your custody under age 13.
  • However, the credit is also available if you paid for the care of your spouse or other dependent who is physically or mentally incapable of self-care and lives with you more than half the year.
  • Your tax-filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent. If you're married but filing separately, you generally cannot receive the credit.
  • You (and your spouse, if married) must be working or seeking employment when the care was administered. Exceptions are made if one spouse is a full-time student or physically or mentally incapable of self-care.
  • The payment must be made to a care provider who is not: your spouse; someone you claim as a dependent; the child's parent; or your child under age 19. (A non-dependent child over age 18 might qualify.)
  • Typical eligible caregivers include: summer day camps (but not overnight camps); daycare, before-school or afterschool care providers; babysitters or nannies; housekeepers who also provide care for your dependent; and nursing, home-care or other providers who care for a disabled dependent.
  • You must provide the taxpayer ID number (usually the Social Security number) of each qualifying dependent on your tax return.
  • You also must report the name, address and taxpayer ID number (either the Social Security number or the employer ID number) of the care provider.
  • For divorced or separated parents, the parent with whom the child lives most of the year can claim the credit, even if the other parent claims the child as a dependent due to the divorce or separation agreement.

The maximum amount of expenses that qualify for the Child and Dependent Care Credit is $3,000 a year for one dependent and $6,000 for two or more. If your adjusted gross income is less than $15,000 you generally can claim a credit for 35 percent of eligible expenses. The percentage gradually decreases, the higher your income. It caps out for those earning more than $43,000, who can claim 20 percent.

Other details:
  • This is a non-refundable tax credit, which means it can't reduce your taxes owed below zero (i.e., it can't generate a refund when the credit amount is greater than taxes owed).
  • If you pay someone to provide care in your home, you may be considered a household employer and therefore liable to withhold and pay Social Security and Medicare taxes from their salary and pay federal unemployment tax.
  • Employer-provided dependent care benefits could reduce your credit amount -- for example, company-provided daycare or money you contributed to a dependent care FSA.
  • If you did contribute to an FSA, you may still be able to claim a partial tax credit, provided the total amount doesn't exceed the $3,000/$6,000 limits.

To learn more about the Child and Dependent Care Credit, see IRS Publication 503 and Chapter 32 of IRS Publication 17.

Bottom line: If you're paying someone to take care of your kids while you're at work, make sure you're taking advantage of the available tax savings.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

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