Many parents are forced to pay for child care in order to hold down a job. And that could be an extremely expensive prospect.
Care.com reports that the cost of a week of day care is $211, on average, for infants. The weekly cost of a nanny? An almost astounding $596, on average.
If child care bills eat up a huge chunk of your budget, the good news is that you may entitled to a bit of tax relief. And that's something to keep in mind as you prepare your upcoming return.
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How the Child and Dependent Care Credit works
The Child and Dependent Care Credit can reduce your tax burden if you currently pay for care so you can work. Like all tax credits, this credit is a dollar-for-dollar reduction of your tax liability. If you owe the IRS $1,000 but score a $600 credit, your tax bill shrinks to $400.
The good news about the Child and Dependent Care Credit is that there are no income thresholds associated with it -- meaning, you can qualify even if you're not a low earner. That said, your income will dictate how much the credit is worth.
You're allowed to claim the cost of child care for any child in your household under the age of 12. You must also claim that child as a dependent on your tax return. From there, you can deduct a percentage of up to $3,000 in child care costs for a single child, or a percentage of up to $6,000 in child care costs for two children or more.
That percentage will depend on your income. If it's below $15,000, you'll get back 35% of your child care costs, up to the aforementioned thresholds. From there, that percentage drops by 1% for every additional $2,000 of earnings, and once your income reaches $43,000 or more, you're limited to 20% of up to $3,000 or $6,000 in child care costs.
Now that may seem confusing, so here's an example that will help clarify how the credit works. Imagine you have two children whose child care costs you $5,000 each, and you earn $80,000 a year. You can claim 20% of $6,000 (even though your care costs more), or $1,200.
Get the money you're entitled to
Child care is no doubt a huge burden, so it pays to get a little tax relief to ease the pain. One final thing you should know about the Child and Dependent Care Credit, though, is that it's not refundable, which means the most it can do is reduce your tax liability to $0. If you apply the credit and are due money, it won't be paid to you. But either way, it pays to run the numbers and see what shakes out. Keep in mind, too, that the Child and Dependent Care Credit is only one of several tax credits geared toward parents, so if you have children, talk to a tax professional or do some research to find out what other benefits you may be entitled to.
