Did you know that daycare expenses for qualifying dependents are partially deductible? Many working parents miss out on these tax savings because they simply forget or aren’t aware of the Child and Dependent Care Credit.

If you are one of the many who have missed out on this credit, you may ask what is the Child and Dependent Care Credit? Well, in short, it is a tax credit available for up to 35% of the costs associated with dependent care—with a cap of $3,000 for one dependent, or $6,000 for more than one dependent—while you are either working or looking for work. Like most of the deductions and credits in our tax code, the Child and Dependent Care Credit has limits and regulations as well. Let’s see if you qualify!child care credit

First of all, you’ll have to meet the “Qualifying Person” test. This simply means that the person you are claiming the credit for is either your qualifying child under the age of 13, your spouse who was living with you for more than half of the year and was unable to care for him/herself, or a person who was your dependent who was not able to physically or mentally able to take care of him/herself and lived with you for more than half of the year.

Secondly, you (and your spouse if you’re married) need to have earned income for the year.  Earned income includes wages, tips, salaries, and the like. It does NOT include social security, unemployment compensation, child support received, etc. If you are unsure of whether or not your income qualifies as earned income, we can help.

Thirdly, the care provided must meet the work-related expense test. This means that the care was necessary so that you (and your spouse if you’re married) could either work or look for work. This gets a little tricky, because only the care being provided so that you can work is deductible. In other words, if you only work part time—2 days per week, but pay for full time daycare—5 days per week, the only deductible expenses are those incurred during the 2 days per week that you are working.

Fourthly, you must answer the question of who is providing the services. The payments for the care services must be made to an outside party. Basically, you cannot pay your spouse or another of your dependents for the care services being provided.

Fifthly is the joint return test. This one is really simple. The only qualifying persons to receive this deduction are those with filing statuses of single, head of household, qualifying widow(er) with dependent children, and married filing jointly. Married but decided to file separately? Generally speaking, you are no longer qualified for this particular deduction due to your filing status, although there are a few exceptions. We can help if you have questions regarding the exceptions.

Sixthly, you must include the care provider’s name, address, and identifying number (usually an EIN) on your tax return or have made reasonable attempts to obtain such information, also referred to as “due diligence”. This is just so the IRS to confirm that the payments are being made to a reputable source.

Finally, the amount which you deduct must be less than the qualifying dollar limit for expenses. This basically means that you take your ceiling for dependent care deductions—either $3,000 or $6,000—and subtract any reduced dollar limits. An example of such would be an employer contribution of $1,000 towards daycare; as a recipient of such a contribution, your available tax credit would be a maximum of $2,000 for a single dependent or $5,000 for 2 or more dependents. Next, to determine just how much of your expenses are deductible, you would find your adjusted gross income and find the range it falls within in the IRS table. Deductions range from 20% to 35%, depending on income. I’ve included the table to the left for a quick reference.

If you want to reap the benefits of the Child and Dependent Care Credit, you’ll certainly have to jump through some hoops to do so. However, most of the “qualifiers” aren’t too hard to figure out and may be well worth the slight headache for the money you can save. If you have questions regarding your eligibility or acceptable deduction amount, give our office a call! Our team of experienced professionals can help you to get the deduction you deserve!

IRS.gov : Publication 17, Your Federal Income Tax– Chapter 32, Child and Dependent Care Credit