How Does the Childcare Tax Deduction Work?

Sure, you might think of them as mommy and daddy’s little tax deduction, but there’s a lot more to be aware of there than you might think, because the childcare tax deduction covers a lot more than just daycare. In fact, it covers a lot more than just kids! Let’s go over this topic one point at a time, though, so that you’ll understand the basics of the credit without getting overwhelmed. Mind you, this snippet of an article is by no means all-inclusive of the information contained within IRS topic 602. Think of it as a primer on your way to understanding how the child and dependent care tax deduction works.

First off, the child and dependent care tax credit isn’t just for your children. It can, in some circumstances, cover your spouse or any other dependent who relies on you for their care for more than a certain set time period during the year. Generally speaking, it covers a dependent or qualifying child who is under 13 years of age during the time care is provided, a spouse who is physically or mentally incapable of taking care of themselves and who lives with you for more than 6 months out of the year, and any dependent person who lives with you for more than 6 months out of the year who is physically or mentally incapable of taking care of themselves. 

The deduction from your taxes is made to help offset the costs of care for that dependent person while you are at work or are seeking work. That means the amount of money you pay to have that person looked after while you can’t perform those tasks necessary for their safety, well-being, or hygiene, are tax deductible up to certain limits. For one dependent, the limit is $3,000, and for two dependents, the limit is $6,000. However, you must reduce this by the amount paid on the part of your employer. For instance, let’s say tuition for your child at a day care totals $5,000 per year. Let’s say that its a company-owned day care that pays $2,500 of that cost after you’ve worked “X” number of years. If you’ve hit that magic number of years, then you can only claim $2,500 of that tax credit for your child since your company paid for half.

Check out Topic 602 Child Credit Here!

Now, we get into the sticky stuff: The reasons you may not take the credit. First off, if you aren’t the custodial parent of a dependent, even you can claim the child as an exemption, you can’t take the childcare tax credit. Of course, there are special circumstances that you can refer to under the IRS topic “Child of Divorced or Separated Parents or Parents Living Apart.”

Additionally, you can’t make the payment to your spouse and claim the credit, though that should be obvious. (No Cheating!) You must be married filing jointly (if you’re married,) and you have to provide the proper identification of the person or persons that you’re claiming for the credit. The care provider information must also be provided on your taxes in order to claim the credit. 

The child and dependent care credit is a great way to reduce your taxes without having to itemize every nickel and dime of your finances. In fact, most tax preparation software available today goes through your finances to determine your eligibility for the credit, so all you have to do is enter the information provided by the care provider, then sit back and watch your tax refund grow!