Raising children is an expensive prospect, but it gets even pricier when you need to pay for child care in order to work. The average American spends $10,192 to send a child to a full-time day care center, or $28,900 a year for a full-time nanny. Even if you only require an after-school babysitter to care for your kids, if you're like the typical family, you'll still be looking at roughly $7,700 a year. Ouch.
It's no wonder, then, that so many parents are desperate for whatever tax breaks come their way. But if you pay for child care, there's a bit of good news: Thanks to the Child and Dependent Care Credit, you could get some money back on your taxes, which is sure to ease the burden a bit.
How the Child and Dependent Care Credit works
The Child and Dependent Care Credit is specifically designed for working families who have to pay for child care. As a quick refresher, a tax credit is a dollar-for-dollar reduction of your tax liability, while a tax deduction simply excludes part of your income from taxes. So if you qualify for a $1,000 tax credit, you'll actually save that $1,000 in full.
The problem with most tax credits is that they phase out at certain income levels, so higher earners often can't take advantage of them. But one of the best features of the Child and Dependent Care Credit is that there are no income limits on it, and while lower earners get the maximum benefit, higher earners can still get something out of it as well.
To qualify for the Child and Dependent Care Credit, you must have paid someone else to take care of a child under the age of 12 whom you also claim as a dependent on your tax return. That caregiver, however, cannot be your spouse, an ex-spouse who is also the child's parent, or any other child of yours. Furthermore, you (and your spouse, if you're married) must have earned income from a job, and you'll need to have paid for child care so that you (and your spouse, if you have one) were able to work or look for work. You're also eligible if you're a full-time student who paid for child care in order to pursue your studies. Finally, you can claim the credit as long as your tax filing status is anything other than married filing separately.
Calculating your credit
The amount of your credit depends on your child care costs and your income. It's a little tricky to figure out, but we'll walk you through it. To start, you'll need to add up the total amount you spend on child care, up to a maximum of $3,000 for a single child or $6,000 for two or more children. If you participate in a dependent-care FSA through your employer, you'll need to subtract whatever funds you get on a pre-tax basis to pay your expenses.
Once you figure out how much you're allowed to claim in child care expenses, your actual credit is calculated as a percentage of that number. The credit can be worth anywhere from 20% to 35% of your expenses, depending on your income. If your income falls below $15,000, you're eligible to get back 35% of your costs. That percentage then falls by 1% for every additional $2,000 of income until it bottoms out at 20% for an income of $43,000 or more.
In other words, the most the credit can actually be worth to you is $2,100 (that's 35% of $6,000). If you're a higher earner with $6,000 in allowable child care expenses, you could get $1,200 out of it.
If you max out your dependent-care FSA at $5,000 but have more than that in qualifying child-care expenses, you can apply up to $1,000 toward your eligible costs using the Child and Dependent Care Credit and then get back whatever percentage of that amount you qualify for based on your income.
One final thing to note about the Child and Dependent Care Credit is that it's non-refundable, so the most it can do is knock your tax liability down to $0. For example, if you owe $500 in taxes and you receive a credit of $1,000, then you'll owe nothing in taxes, but you won't receive a check for the leftover $500.
If you're struggling to keep up with the cost of child care, then be sure to see how much money the Child and Dependent Care Credit could put back in your pocket this year.