Navigating the Childcare Tax Credit: Essential Tips for Parents
THE CHILDCARE TAX CREDIT
I always get asked if babysitters or daycare tuition are deductible business expenses. Unfortunately, the answer is no. The IRS does not allow these expenses to be written off as business expenses on your taxes.
However, you may be eligible for a tax credit that can significantly reduce your tax payment to the IRS!
PRO-TIP:
A tax credit is a dollar-for-dollar reduction in your tax liability! For example, a $3,000 tax credit offsets your tax bill by $3,000, meaning you pay $3,000 less in taxes!
If both you (and your spouse, if you file jointly) pay for child care so that you can work (or are looking for work!), you may be eligible for this credit! Here are the requirements:
- Your dependent child must be under 13 years old
- You must have lived in the United States for more than half of the year
HOW IS IT CALCULATED?
You are entitled to a tax credit of up to 20-35% (depending on your adjusted gross income) of your eligible childcare expenses. Your total expenses cannot exceed $3,000 for one kiddo or $6,000 for two or more children.
If you paid over $6,000 for childcare expenses for your three kiddos, only $6,000 would count for the calculation, so your maximum deduction would be between $1,200 and $2,100, based on your income levels.
NOTE: Your eligible expenses cannot be more than your (or your spouse’s, if you file jointly) earned income for the year. For example, if you earned $50,000 for the year, your spouse earned $5,000, and you paid $24,000 in childcare expenses for the year, only $5,000 of your expenses would count towards the calculation of your childcare tax credit.
NOTE: If you receive dependent care benefits through your (or your spouse’s) employer, the amount of your credit will likely be reduced. Your CPA will determine this at tax time!
WHAT EXPENSES COUNT?
Below is a list of eligible childcare expenses:
- Preschool or nursery school expenses
- Daycare Tuition
- Before or after school care for your elementary-aged kiddos
- Summer day camp expenses (overnight camps do not count!)
HOW DO I TAKE THE CREDIT?
The tax credit is calculated on Form 2441, on your personal tax return. You will need to provide your CPA with the following information at tax time:
- The name, address, and tax ID number for each organization (or person) you paid childcare expenses to!
- The total amount paid to each organization (or person)
- The total amount paid, broken down by kiddo
As always, if you have any questions about whether you are eligible for this tax credit, check with your CPA!
