The Childcare Credit was created in 1997 by Congress to provide parents with an incentive for working outside the home. It allows eligible families to claim a $1,000 per child tax credit for each year that they spend at least 13 hours per week caring for a child under age 6.
The childcare tax credit is a federal government-sponsored program that helps low-income families with the costs of childcare. The credit is available to both working and stay-at-home parents and can be used for a variety of childcare expenses including daycare, babysitting, and after-school programs.
The tax credit for childcare is not well-known but can be extremely valuable for families who are struggling to make ends meet and would benefit dramatically from some governmental help to pay for dependent care expenses. In this guide, we will cover everything you need to know about the childcare tax credit, from how it works to how you can apply for it.
What’s the difference between a tax credit and a tax deduction?
There are two main types of tax breaks for families with children: the Child and Dependent Care Credit and the Dependents Care FSA. Both offer some major tax benefits, but they work in different ways. The Child Care Tax Credit is a tax credit, which means it reduces your taxes owed dollar-for-dollar. For example, if you have a $20,000 tax bill and a $2,000 tax credit, you only will owe $18,000 in taxes rather than $20,000.
The Dependents Care FSA is a tax deduction, which means it lowers your taxable income which in turn lowers your tax bill because our tax bill is a percentage of taxable income (which contributions to a dependent care FSA lower). The Child and Dependent Care Credit is available to anyone who pays for child care so they can work or look for work. The credit is worth up to 35% of your eligible childcare expenses, up to $3,000 for one child or $6,000 for two or more children. The Dependents Care FSA is only available if you have an employer who offers this benefit and can only be used to pay for qualifying expenses. With a Dependents Care FSA, you can set aside up to $5,000 of your paycheck pre-tax to pay for eligible child care expenses. This can save you up to 30% on your childcare costs.
What is the Childcare Tax Credit?
The Childcare Tax Credit is a tax credit available to parents who pay for childcare. The credit is worth up to $1,000 per child, per year. There’s an income threshold of $60,000 per tax year. Therefore, in order to qualify, parents must have an income level under that. The credit is refundable, which means that even if you owe no taxes, you will still receive the full amount of the credit.
How to Qualify For the Childcare Tax Credit
In order to qualify for the childcare tax credit, you must have a child who is under the age of 13 and who you are claiming as a dependent on your taxes. Additionally, you must have paid for childcare expenses in order to be able to work or look for work. The amount of the credit is based on the amount of money you spent on qualified expenses, up to a maximum of $3,000 per child ($6,000 for two or more children).
How To Know If You’re Eligible For the Childcare Tax Credit?
If you meet these criteria, your family can claim this credit:
If you’re caring for an elderly dependent in 2021 who is at least 13 years old, has lived with you for more than half of the year, and is unable to care for themselves OR your family member (aged 65 or older) was a dependent of yours in 2020 and lives with you more than half the year.
Needed care of a child or dependent. (In a two-parent family, both spouses must have needed care of a child or dependent unless one spouse was a full-time student.)
You can be eligible for the Earned Income Tax Credit if you spent less on dependent care during 2021 than your total income for the year. If you are married and filing a joint tax return, you would need to have paid less on care than your spouse with the lowest earnings. You must follow specific rules in order to calculate the lowest-earning spouse’s income.
What Types Of Care Are Qualified For The Childcare Tax Credit?
Allowable expenses are resources that take care of a qualifying child or dependent including childcare services. Child or dependent care refers to any type of care for a qualifying child or other dependents, including resources like those found at day care centers, nursery school, the cost of childcare providers, summer camp, family daycare homes, churches, and vacation day camps. It also includes care from neighbors or relatives (except if that person is the spouse, a dependent, or someone under 19 years old). Essentially, basically, the cost of child care services, in general, is qualified for the most part. Be sure to talk to your tax professional to clarify on whether your expenses were and keep your receipts.
If a family is receiving subsidized child care, like from a state-subsidized program, the care cannot be used to qualify for the credit. However, if families are paying copayments for that subsidized care, those payments would be eligible expenses.
Claiming all three credits when possible means an even better financial outcome for you and your family.
Although tax dependency on a child can be claimed as long as the child is claimed as a tax dependent, there are special circumstances for children of divorced or separated parents. See IRS Publication 503, Child and Dependent Care Expenses, “Child of divorced or separated parents or parents living apart” section.
How Much is the Childcare Tax Credit?
The Childcare Tax Credit is a tax credit worth up to $3,000 per child, per year, for families who pay for childcare. The credit is available for children under age 13 and can be used to offset the cost of daycare, nannies, after-school programs, and other eligible expenses.
To calculate the credit, families first determine their gross income and then use the IRS’s online calculator to figure out how much they are eligible to receive. The credit is based on a percentage of the family’s income and the number of children in care. For example, a family with an annual income of $60,000 and two children in childcare would be eligible for a credit of up to $1,800.
Families can claim the Childcare Tax Credit on their federal income tax return. The credit can be applied to both state and federal taxes owed.
The Childcare Tax Credit and Your Taxes
If you’re a working parent, you know how expensive childcare can be. The good news is that the government offers a childcare tax credit to help offset some of those costs. Here’s what you need to know about credit and how it can help reduce your tax bill.
The Childcare Tax Credit is a federal credit that helps working families offset the cost of childcare. The maximum credit is worth up to $3,000 per child and can be claimed for children under the age of 13. To qualify, you must have earned income from employment or self-employment during the year.
There are two ways to claim the credit: as a deduction on your income taxes, or as a refundable credit against your tax liability. If you choose to claim the credit as a deduction, it will reduce your taxable income by the amount of the credit. For example, if you have $50,000 in taxable income and claim the maximum $3,000 credit, your taxable income would be reduced to $47,000.
If you choose to claim the credit as a refundable credit, it will reduce your tax liability dollar-for-dollar. So, if you owe $5,000 in taxes and claim the maximum $3,000 credit, your tax liability would be reduced to $2,000. You would then receive a refund for any remaining balance owed.
How to Claim the Childcare Tax Credit
Qualifying for the Child Tax Credit is easy. Simply enter your children and other dependents on Form 1040, U.S. Individual Income Tax Return, and attach Schedule 8812, Credits for Qualifying Children and Other Dependents, where the credits will be calculated automatically.
OTIP is an early payment program that provides advance Child Tax Credit payments to eligible families with young children. You can only get OTIP if you are not receiving Social Security benefits and are under 65 years old. If you received the advance Child Tax Credit in 2021, learn how to claim the rest of your refund on your taxes for that year.
You can learn more by checking out the publication on the art on the IRS website located here.
If you’re not sure how to file for this credit, don’t roll the dice and try on your own. Contact a tax preparer and they’ll make sure you file your tax return and the complete form properly.
The childcare tax credit can be a valuable tool for offsetting the high cost of childcare. Be sure to take advantage of it if you’re eligible!
The childcare tax credit is a great way to offset the cost of childcare. If you are eligible, be sure to take advantage of it. And if you have any questions about the credit, be sure to speak with a qualified tax professional.
Other Tax Credits for Families
If you qualify for the Child Tax Credit, you may also qualify for these tax credits!
Make sure you don’t forget to check or ask your tax professional if they did.
- Child and Dependent Care Credit
- Earned Income Tax Credit
- Adoption Credit and Adoption Assistance Programs
- Education credits
- Recovery Rebate Credit (Economic Impact Payments)
- Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals
You may qualify for the Credit for Other Dependents for a child or dependent who is not a “qualifying child” for purposes of the Child Tax Credit.