It's no surprise that the cost of raising a child is increasing, but there are several tax credits that may ease your tax burden.
Among the many expenses parents incur is child care. You may be eligible for the Child and dependent care tax credit if you currently pay for care for your under-age-13 dependent child or children so that you can be gainfully employed. To claim the credit, the child must live with you for more than half the year.
NOTE: the credit can also apply to your disabled child over age 13, disabled spouse, or dependent parents. The credit may also be available if you are unemployed and searching for a job.
Qualifying expenses can include:
- In-home related expenses of a housekeeper, babysitter, or cook.
- Services performed by a dependent care center if the center is certified and in compliance with all local laws.
- A portion of boarding-school expenses but not overnight camp fees
- Summer school
- Day camp
- Care centers for sick children
- Kindergarten expenses
- Live-in caregivers
The credit ranges from 20 to 35 percent of qualified employment-related expenses, but is subject to a cap calculated as a percentage of these expenses. The maximum amount of eligible expenses is $3,000 if you have one qualifying dependent, and $6,000 if you have two or more qualifying dependents.
Make sure to retain accurate records and receipts for all of your care expenses. Secure W-10 forms from care providers. Click here for detailed form instructions
If you work for an employer that provides for tax-advantaged, dependent care assistance, that may result in taxable income. However, there is an exclusion available, and some taxpayers may be able to take advantage of flexible spending account (FSA) programs enabling them to make tax-free contributions that can be used to pay child care expenses later on. Here are a few of the details:
1. Up to $5,000 of dependent-care assistance that you receive from an employer-paid, nondiscriminatory child care program for employees is completely tax free (the figure is $2,500 for married, filing separate income tax returns). The excludable assistance must be for the care of children for whom the child-care credit is available.
2. If your employer maintains a cafeteria plan, the amount you elect to receive for child-care assistance under the plan is tax-free if the benefit provided doesn't exceed $5,000 ($2,500 for married, filing separately).
3. Your employer may maintain a flexible spending account that essentially allows you to choose to reduce your salary by an amount that's set aside in an account set up to pay for child-care expenses (up to $5,000 or $2,500). In effect, such a plan enables you to pay for part or all of your child-care expenses with pre-tax dollars.
If you are provided with some form of employer-provided assistance you may need to consider whether to use the cafeteria plan or flexible spending account or pay for the care expenses with your own cash and claim a tax credit. If you are in this position, a decision must be made well before the beginning of each year.
We can help you determine which choice will save you the most from a financial and a tax perspective. We can also fully explain any other tax issues related to your choice of care. Give us a call with any questions you may have.