What are the Tax Benefits of Childcare Costs?

The last day to file taxes is Monday, April 15 and if you’re procrastinating, you’re not alone. Filing your taxes may not be the most exciting thing you’ve ever done, but if you’re new to the kid thing or you recently started paying for childcare, you can look forward to some financial rewards from the IRS. WHOO HOO!

Although you can’t deduct childcare expenses on your tax return (which will decrease your taxable income), you may qualify for a credit and increase your total refund. Here’s a brief look at some of the potential tax benefits of childcare costs.

The Child and Dependent Care Credit

What is it? The Child and Dependent Care Credit is a tax break for working people. It reduces the amount of federal income taxes due, which, in turn, increases your refund.

How much is the credit? The amount of the credit depends on the expenses you paid for childcare so that you and your spouse could work, but it may cover up to 35 percent of qualifying expenses. The amount of the credit also varies depending on your gross adjusted income.

What else should I know? The great thing about this credit is that the IRS considers more than just the cost of daycare as a qualifying expense. Other qualifying expenses include the cost of summer day camp fees, before and after-school care for children under 13, work-related babysitters, or a cook, maid, or cleaning person who also cares for your child while you work. You can also qualify for this credit for someone other than your child who is a qualifying dependent.

You may qualify for the Child and Dependent Care Credit if: You earned income for the tax year (this goes for your spouse too if you are married and are filing jointly) Your child or dependent is under the age of 13 and unable to care for themselves Your filing status is married filing jointly, single, head of household, or qualifying widow or widower with a qualifying child You are the custodial parent or main caretaker of the child You used the childcare so you could work or actively look for employment The childcare provider is someone other than your spouse, dependent, or the child’s parent

The Child Tax Credit

What is it? The Child Tax Credit is another credit you can use to boost your income. It only applies to dependents under the age of 17.

How much is the credit? The credit is worth up to $2,000 per dependent, however, the amount you get will depend on your income. If you earned more than $200,000 or $400,000 for joint filers, the credit will be reduced.

What else should I know? This credit is refundable up to $1,400. Meaning, if you qualify for it and it reduces the amount you owe the IRS to less than $0, you will still receive the remaining amount of the credit, up to $1,400. Also, under the Tax Cuts and Jobs Act, this credit now includes a $500 non-refundable credit for each non-child dependent, which could include an elderly parent or a 17-year-old child.

You and/or your child may qualify for the Child Tax Credit if: Your child was under the age of 17 at the end of the tax year for which you claim the credit Your child did not provide more than half of his or her financial support during the tax year Your child is biologically yours, adopted, a foster child, or a step-child (they may also be a sibling, niece, nephew, or grandchild) Your child is a U.S. citizen, U.S. national, or U.S. resident alien. He or she must also have a Social Security Number. Your child lived with you for more than half of the tax year for which you claim the credit You claimed your child as a dependent You earned at least $2,500

A Dependent Care FSA

What is it? Some employers offer a dependent care flexible spending account (FSA) program, which gives parents the ability to put aside a portion of their salary to pay for childcare expenses. Not all employers offer this, but you can check with your HR department to find out if yours does.

How much is it worth? The cap on a dependent care FSA is $5,000. However, the funds are also withdrawn from your paycheck before payroll taxes are deducted, so your overall taxable income is reduced.

What else should I know? If you earn more than $43,000, you may be better off using a dependent care FSA instead of claiming one of the credits listed above. The only downside is that only up to $500 of any remaining balance will roll over into the next year. So if you don’t budget very accurately, any unused funds will be lost.

Eligible expenses for Dependent Care FSAs include: Before and after-school care for a child under the age of 13 Expenses for a babysitter or nanny for a child under the age of 13 Daycare, nursery school, or preschool for a child under the age of 13 Summer day camp for a child under the age of 13 Care for a spouse or relative who lives with you and is physically or mentally unable to care for themselves

It’s no secret that the costs associated with raising a child can be very expensive, but there are some benefits when it comes time to file your taxes. We know filing taxes is a drag, but brew a big cup of coffee (or pour a giant glass of wine) and get down to business so you can offset your childcare costs and reap the benefits.

DISCLAIMER: The best way to find out if you are eligible for a tax credit for childcare expenses is to speak with a professional tax preparer.