Choose the right child care provider, get a tax break
Child care costs can range from $4,500 to $16,000 annually depending on the child’s age, the type of care provider and the state where a family lives. In addition, child care needs can change as kids grow up, families add new siblings or parents change jobs. With all these changes, parents may not realize what tax benefits are available to them for child care, including a potential child care tax credit between $600 and $2,100.
To be eligible for the tax credit, the child care must generally be for a child under 13 and must enable the parent or parents to work or look for work. As a family uses a combination of day care, school, babysitters, camps and more to handle their changing child care needs, the type of care they choose could impact their eligibility for the child care tax credit.
Babysitters for date night need not apply
Generally, parents’ incidental use of a babysitter, such as to run errands or go on a date, would not qualify for the child care tax credit. If parents want to use babysitting expenses – while on an interview, taking an extra shift or filling in for a lapse in regular child care – toward the child care tax credit, they have to identify and report the babysitter’s name, address and taxpayer identification number (usually, the babysitter’s Social Security number).
Separate professional nanny from tax family
Nannies are more likely than babysitters to provide regular child care that enables parents to work. Therefore, parents can use the cost of their nanny toward the child care credit as long as the nanny is not the parent’s spouse, the child’s parent, another child under the age of 19 or another dependent. Therefore, while an independent grandmother could potentially qualify, a parent’s college student who lives at home would not. Parents who use a nanny may be considered “household employers,” which means they would likely have to issue a W-2 to the nanny, withhold and pay Social Security and Medicare taxes and pay the federal unemployment tax.
Follow the law for day-care centers and family day cares
Expenses to send a child to day care, whether in a day-care center or at a provider’s home, will typically qualify toward the child care credit. Day-care centers that care for more than six children for a fee must comply with all relevant state and local laws in order for expenses to qualify.
Context matters for before- or after-school programs
If before- or after-school programs are primarily for the care of the child, rather than for an educational purpose, the costs may qualify toward the child care credit. Sending a child to art class after school could count toward the child care credit if it covers a gap in care until the parent finishes work, but it would not qualify if it is done to develop a child’s artistic abilities while the parent is not working.
Camps must send kids home overnight
Overnight camp expenses do not qualify for the child care credit, but parents may use day camp expenses toward the credit if the child is in camp while the parents work and all other requirements are met. Transportation costs to and from the camp each day do not count toward the child care credit.
Private school is not child care
Some parents might think of private school tuition for kindergarten and early grades as part child-care expense and part education expense. However, the tax code considers it an education expense for a child in kindergarten or higher.
Claiming the credit
If they meet all the requirements, parents can claim a child care tax credit for eligible expenses capped at $3,000 for one child and $6,000 for two or more. Parents receive a benefit sliding between 20 and 35 percent of their expenses based on their adjusted gross income (AGI), with the credit diminishing as income increases. Taxpayers with AGIs lower than $15,000 receive the maximum 35 percent while those with incomes more than $43,000 receive the minimum 20 percent credit.
Parents should consider taking advantage of dependent care benefits if offered by their employers. These savings accounts, used separately or in combination with the credit, can offer the greatest tax savings. The eligibility rules are the same as those for the credit.
Whether a child care provider will help parents maximize their tax benefit is just one of many important factors parents must consider when choosing a provider. Their local tax expert can help parents understand the options available to them in their specific situations.