Single parents and two-career couples must find ways to care for their young children while they work. The tax code provides a way for parents to recoup some of their expenses for child care through a nonrefundable tax credit. This credit is also available to taxpayers who care for disabled dependents and spouses.
If you paid expenses for the care of a qualifying child or other dependent, you may be eligible to claim a tax credit.
To claim the child and dependent care credit, you must meet the following requirements:
You and your spouse generally must file a joint return.
The care must be provided so that you (and your spouse, if married) can work or look for work.
You must have some earned income. If you’re married and living together, both you and your spouse must have earned income (unless one of you is a student or disabled). If one spouse is a full-time student for at least 5 months of the year or disabled, he or she is deemed to have earned income of $250 per month for 1 child or $500 per month for 2 or more children.
You and the person(s) for whom the care is being provided must live in the same home for more than half of the year.
The person who provides the care can’t be your spouse, the parent of your qualifying child under age 13, or a person whom you can claim as a dependent. If your child provides the care, he or she must be age 19 or older by the end of 2010 and may not be your dependent.
You and your spouse can claim the credit even if you’re not filing a joint return if you meet the following requirements:
You paid more than half the cost of maintaining a household for the year that was the principal residence of both you and the qualifying person for more than half the tax year, and
Your spouse wasn’t a member of the household during the last 6 months of the tax year.
To claim a credit for qualified expenses (defined below), the care must be provided for 1 or more qualifying persons.
Qualifying persons include:
A dependent who is a qualifying child and who hasn’t reached his or her 13th birthday when the care is provided. Generally, you must be entitled to claim the child as a dependent, but an exception applies for children of divorced or separated parents. In the case of divorced or separated parents, the child is the qualifying child of the custodial parent for purposes of this credit, even if the noncustodial parent claims the child as a dependent.
A dependent of any age who is physically or mentally incapable of self-care and who has the same principal residence as you do at the time the care is provided.
A spouse who is physically or mentally incapable of self-care and who has the same principal residence as you do at the time the care is provided.
Qualified-child or dependent-care expenses are those incurred for the primary purpose of assuring the well-being and protection of a qualifying person while you work or look for work.
Qualified expenses include the following:
Expenses for care provided outside the home for the qualifying child, disabled dependent, or disabled spouse can be counted provided the qualifying person regularly spends at least 8 hours each day in your home. If the care is provided in a dependent-care center (one that cares for more than 6 persons for a fee) the center must comply with all relevant state and local laws.
Expenses for in-home care of a qualifying child, disabled dependent, or disabled spouse. Qualified expenses for in-home care can include amounts paid for cooking and light housework related to the care of a qualifying individual, as well as actual care. Expenses for chauffeur or gardening services don’t qualify. Total qualified expenses also include gross wages paid for qualified services, plus the cost of meals and lodging furnished to the employee, plus your portion of Social Security, Medicare, FUTA (federal unemployment), and any other payroll taxes paid on the wages.
The following expenses don’t qualify for the child and dependent care credit:
The cost of transportation to and from the child care facility
Overnight camp expenses, and
Any expenses allocable to the education of a child in kindergarten or higher
However, the cost of before- or after-school programs may qualify if the program is essentially for the care of the child. The total cost of schooling below the level of kindergarten (nursery school, for example) qualifies only if the cost of schooling can’t be separated from the cost of care.
The credit is equal to 20% to 35% of qualified expenses. The applicable percentage depends on your adjusted gross income (AGI). The maximum amount of qualified expenses that can be used to calculate the credit is $3,000 for 1 qualifying individual and $6,000 for 2 or more qualifying individuals. To claim the credit, you must complete Form 2441.
Some employers provide on-site child care for their employees’ children. Others pay directly for third-party child care, or allow employees to reduce their salaries and save the reduction in accounts specifically earmarked to pay for child-care expenses. In these cases, the value of the child care or the amount paid by your employer or taken from the account isn’t reported to you as taxable income provided the benefits do not exceed $5,000. If the amount of the benefits provided exceed $5,000, the amount above $5,000 will be reported as taxable income.
Section 125 plans, also called cafeteria plans or flexible spending accounts, are salary-reduction arrangements offered by some employers. These plans allow employees to reduce their salaries by a certain amount in return for 1 or more nontaxable benefits. A common example is a flexible spending account used to pay child-care or medical expenses.
The amount of child and dependent care benefits provided by your employer will be shown in box 10 of Form W-2. Expenses paid or reimbursed with DCBs may not also be used to claim the child care credit. Thus, the amount of child and dependent care credit you are entitled to receive will have to be reduced by the amount shown in box 10 of Form W-2. When your W-2 form shows dependent-care benefits, you must complete Part III of Form 2441, even if you’re not claiming a child care credit.
Example: Taxpayer has 2 qualifying children and is entitled to receive $6,000 in child and dependent care credit. However, the taxpayer receives benefits of $3,000 during the tax year form their employer which is reported in box 10 of Form W-2. The taxpayer will have to reduce the $6,000 in child and dependent care credit by the $3,000 in employer benefits received. Thus, the taxpayer will only be entitled to receive $3,000 in child and dependent care credit.
For more information, see IRS Publication 503, Child and Dependent Care Expenses.