Child Care Tax Credit Requirements
The first condition is that the tax credit can only be applied for a maximum of two children. These children must be 12 years old or younger by the end of the tax year. There is an exception however if the child is physically or mentally disabled and is unable to care for themselves while their parents are at work they can be claimed at any age.
A second condition is that parents can only claim child care expenses while they are working, looking for work, or in school full time. Expenses outside of that time frame are not covered. Expenses such as paying the babysitter for date night; are considered personal expenses and are not eligible. In addition, these child care costs must be going towards a qualified provider. They cannot apply to additional expenses such as food, lodging, clothing, education, and entertainment. However, the expenses can apply to household services that are at least partly for the well being and benefit of the child, such as housekeeping.
Third, in order to claim the tax credit, couples must either be married filing jointly or filing as a single taxpayer. The appropriate tax filing used may alter whether or not the child care tax credit is available. For example, if you file taxes separately from your spouse the tax credit is unavailable. Also, the parent, or parents if married, must have earned income. Investment or dividend profits do not count. This underlines the fact that this credit was developed to be a helpful tax benefit working parents, while they actively work.
Finally, the child care provider must also be proven to be qualified, legitimate, and legal to work. This can be done by providing the child care provider's name address and Social Security number or Employment Identification Number within tax returns using IRS form W-10, Dependent Care Provider’s Identification, and Certification. It is possible to use a family member but again, specific conditions must apply. They must be at least nineteen. They cannot be a secondary claimed dependent. They cannot be your spouse and they cannot be the parent of the child. However, there are additional social and educational benefits in opting to using an experienced high-quality child care provider. Many studies have shown that children who regularly attend child care are better prepared cognitively and socially when beginning the structured education system.
What Are the Other Stipulations?
The child care tax credit applies a tax credit of 20-35% on the first $3,000 spent on professional child care. For two children this increases to a maximum incursion of $6,000. The specific amount able to be applied to the tax credit is determined by the taxable income of the parent or parents. If the household income is at least $15,000 for the year, it is possible to deduct 35% of child care from the taxes owed. However, if the household income is $43,000 or above for the year, it is only possible to deduct 20% of child care costs when filing income tax returns. It is important to note that there is no upper-income limit to claiming this benefit.
Other Tax Credit Opportunities
An additional tax credit working parents can receive is the Earned Income tax credit. The earned income tax credit primarily benefits those with more than two children. The eligibility of receiving this credit is increased by having additional children. Though there is an exception if income is low, the parent is working, single, and has only one child. This condition also qualifies them for the earned income tax credit. The credit can greatly reduce taxes owed and increase tax returns.
Some employers are able to establish and offer a dependent care account. Through one of these accounts, it is possible to set aside some pre-taxed dollars for child care costs. ‘Pre-taxed dollars’ are earnings taken out of a paycheck before taxes are calculated. These accounts are limited to $5,000 for two working parents or $2,500 for each parent if they are not filing together. These accounts are limited by the families’ earned income. It is not possible to claim an amount that is greater than the earned income of either parent. Both parents must be working in order to use a dependent care account. It is possible to use both a dependent care account and still claim the child care tax credit. However, any money contributed to the dependent care account must be subtracted from the maximum amount of tax-deductible child care expenses you can claim under the child and dependent care credit.
Through combining tax credits along with Jump Start’s line of credit program, parents can see a reduction in the burden of high child care costs through reduced monthly payments. We also pay qualified child care providers directly, which ensures that those costs only go to child care expenses. Our goal is to help parents provide quality child care for their children in a way that makes sense while reducing monthly expenses. Learn more about us today!
*Nothing in this article should be construed as financial or tax advice. Consult with your tax advisor to determine tax credits that apply to your personal circumstances.