Childcare and Taxes

Did you know you may be eligible for a tax credit against taxes owed for what you pay in childcare? Believe it or not, many people are aware of this federal tax credit, but not many understand how it actually works. Further, even fewer actually take advantage of the benefit on their annual income taxes. That said, the tax credit is real, and it is one of many of the tweaks the federal government makes to tax code to help encourage social behavior. In this case, the federal government wants to make it easier for parents to work. The obvious benefit, of course, is that the government realizes more taxpayers and hopefully less people relying on social services such as welfare. However, the specific tax credit itself is a bit more technical in nature.

Monies paid to an eligible childcare provider can and do count toward a tax credit available to all taxpayers if they meet specific criteria. First off, the care paid for has to be the right type. In the case of this credit, the care must be for a child 12-years-old or younger, at least in the tax year the credit is claimed. Adult care can qualify if the adult cared for has clearly been documented as unable to care for himself. Anybody being claimed needs to be reported on tax filings, so it’s not as if you can just pile a bunch of receipts together. The documentation has to show proof of the eligible recipient. In most cases, the IRS tax forms ask for the name of the given child or adult.

Next, the care paid for has to be done so that you, or your spouse when filing jointly, can work or find a job. Care paid for when you don’t work and aren’t looking for employment is not eligible for the credit. And remember, even though the IRS doesn’t ask for this information up front, you will still need to be able to prove the situation if audited. So you need to keep records of employment or attempts to find jobs, such as copies of hiring applications filed.

The money used to pay for the childcare needs to have come from earned income in the form of wages of net profits from your own business. Both employees and contractors can use the tax credit, you just need to be able to show sources of income that paid for the childcare monthly. So, for example, if you’re a lottery winner and you don’t work otherwise you can’t claim the credit since your funds didn’t come from earned income. A common situation involves college students who don’t work but who may use student loans to pay for childcare. This too would not count as eligible income.

One point the IRS is clear on is that you can’t claim payments to your spouse, a relative, or someone whom the child is a dependent of. This would be essentially claiming a credit for moving money around in your own family, which is not allowed. Care providers actually need to be documented on your tax filings, including their tax identification number as a business. Further, you can’t make a claim on care for a child when the little one only lived with you for a month. The IRS rules clearly state the child must have lived with you directly for at least half of the calendar year. The exceptions to the rule, however, include situations where there was a sudden parent death or divorce in the same tax year.

So how much is this tax credit actually worth? Well, it’s not uncommon for parents to find themselves paying $400 to $1,000 a month for childcare. The tax credit provides for a maximum of 35 percent of qualified expenses. However, the amount of the 35 percent depends on your total gross income and the coverage caps out at $3,000 per child in a year. When there are two or more, the coverage ceiling is hit at $6,000. Above certain annual gross income amount, the tax credit is lost and you can’t claim it at all.

You also can’t double-dip with any benefits you may get from an employer. If your employer provides childcare benefits, then you need to reduce your total figure spent by what was received elsewhere before claiming the net figure as a tax credit.

Everyone’s situation will be somewhat different so it helps to check out the details directly. You can find far more detail provided by the IRS directly under Publication 503 – Child and Dependent Care Expenses. The document can be obtained from the IRS’ Internet website or by calling 800-TAX-FORM (800-829-3676) for a mailed copy.


IRS Publication 503, Child and Dependent Care Expenses

IRS Form W-10, Dependent Care Provider’s Identification and Certification

IRS Form 2441, Child and Dependent Care Expenses

IRS Form 2441 Instructions

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