July 27, 2017
Maximize Your Child Care Credit
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On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
Article Highlights:
The credit ranges from 20% to 35% of non-reimbursed expenses, based upon your income, with the higher percentages applying to lower income taxpayers and the lower percentages applying to higher income taxpayers.
The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more, and the credit is non-refundable, which means it can only reduce your tax to zero, and the excess is lost.
Special Issues – As with everything related to taxes, there are special requirements for the credit that apply:
- Age Limitation
- Credit Percentages
- Expenses
- Child Turns 13 During Year
- Dependency Requirement
- Camps
- School Expenses
- Day Care Facilities
- Dependent Care Benefits
- In-home Care
- Caregiver
- Disabled or Full-time Student Spouse
- Married Separate Filers
- Records Required
The credit ranges from 20% to 35% of non-reimbursed expenses, based upon your income, with the higher percentages applying to lower income taxpayers and the lower percentages applying to higher income taxpayers.
AGI Adjusted Applicable Percentage
| AGI Over | But Not Over |
Applicable Percent |
AGI Over | But Not Over |
Applicable Percent |
| 0 | 15,000 | 35 | 29,000 | 31,000 | 27 |
| 15,000 | 17,000 | 34 | 31,000 | 33,000 | 26 |
| 17,000 | 19,000 | 33 | 33,000 | 35,000 | 25 |
| 19,000 | 21,000 | 32 | 35,000 | 37,000 | 24 |
| 21,000 | 23,000 | 31 | 37,000 | 39,000 | 23 |
| 23,000 | 25,000 | 30 | 39,000 | 41,000 | 22 |
| 25,000 | 27,000 | 29 | 41,000 | 43,000 | 21 |
| 27,000 | 29,000 | 28 | 43,000 | No Limit | 20 |
The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more, and the credit is non-refundable, which means it can only reduce your tax to zero, and the excess is lost.
As an example, say your income (AGI) is between $33,000 and $35,000. Your credit percentage would be 25%. If you paid child care expenses of $4,000 for two children under the age of 13, your tax credit would be $1,000 ($4,000 x 25%). If your tax for the year is $5,000, the credit would reduce that tax to $4,000. On the other hand, if your tax for the year is $3,800, the credit would reduce your tax to zero and $200 excess credit would be lost.
Special Issues – As with everything related to taxes, there are special requirements for the credit that apply:
- Expenses – The expenses allowable in computing the credit are limited to your earned income, typically your wages and net self-employment income. For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse.
- Child Turns 13 During the Year – If your dependent child turned 13 during the year, the child care expenses you paid for the child for the part of the year he or she was under age 13 will qualify as child care expenses. The age restriction does not apply if the individual is disabled (isn't physically or mentally able to care for him or herself) and qualifies as your dependent. There are some situations when a disabled individual may qualify even if not your dependent; check with this office for details.
- Dependency Requirement – The child for whom you paid the care expenses must be your dependent. So, for example, if you are divorced and your ex-spouse claims the dependency exemption for your child who lives with your former spouse, you may not claim the child care credit even if you pay some or all of the child care expenses. On the other hand, under a special rule for divorced or separated parents, if you are the custodial parent, even if you cannot claim the child as a dependent, you would be eligible to claim the credit for the qualified child care expenses you paid.
- Camps – The costs of day camp generally count as expenses toward the child care credit. A day camp or similar program may qualify, even though the camp specializes in a particular activity, such as soccer or computers. Overnight camps or tutoring expenses will not qualify for the credit. However, those expenses may qualify for a medical deduction if they are for a special school for a mentally impaired or physically disabled person, and if the main reason for using the school is its resources for relieving the disability.
- School Expenses – Generally, the costs of school (education) do not count as expenses for the credit. However, school expenses for a child below the level of kindergarten will qualify for the credit.
- Day Care Facility – The expenses paid to a day care center qualify. If the day care center cares for more than six persons, it must comply with applicable state and local laws.
- Dependent Care Benefits – Some employers have dependent care assistance programs for the benefit of their employees. Payments received under these plans and used by an employee to pay dependent care expenses are excludable from employees’ incomes. The maximum amount of tax-free dependent care benefit is currently limited to $5,000 of qualifying expenses. Any amount reimbursed under a dependent care assistance program must be subtracted from the $6,000 of qualified expenses allowed to determine the credit. CAUTION: If you have only one child and receive more than $3,000 in dependent care benefits, the excess over $3,000 will be taxable to you.
- In-home Care – If you pay someone to come to your home and care for your child or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay Social Security and Medicare tax as well as pay federal unemployment tax and issue the caregiver a W-2 form. Call this office for additional information related to household employees. However, if the caregiver provides the services in his or her home, the caregiver would not be considered your household employee.
- Caregiver – For the purposes of claiming the credit, the individual who provides the care services and receives the child care payment cannot be your spouse or someone you can claim as your dependent on your return. The individual who provides the care also cannot be your child who is under age 19, even if he or she is not your dependent.
- Disabled or Full-time Student Spouse – There are special $250 “earned income” allowances for months when the taxpayer or spouse is disabled or a full-time student.
- Married Separate Filers – Generally, an individual using the married separate filing status cannot claim the credit, but there are circumstances that allow the individual to be considered unmarried. Contact this office for further information.
- Records Required – To claim the credit on your tax return, you will need to provide the care provider’s name, address, and tax ID number. No credit is allowed without that information. If you have more than one child who qualifies you for the child care credit, you must also show the expenses paid for each child, up to the $6,000 total maximum allowance. If your state allows a child care credit, additional information, such as the care provider’s phone number, may be required.
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