Your goals for 2018 probably included “spending less money," among other things like “eating more vegetables” and “asking for a raise," right? But nine times out of 10, when we talk about “spending less money,” we’re actually talking about not blowing our paychecks on the latest spring loafers and our city’s best hot toddy (flu, anyone?).
Now is about the time you are starting to crave those purchases again and, friends, you’re in luck because today we’re talking all about the Childcare Tax Credit and everything you need to know about the child tax credit to make sure you get the most dollar-for-dollar reduction in your taxes this tax year as possible.
All families have a tax liability. As a taxpayer, you need to file taxes at the end of each taxable year. But achild tax credit can help lighten the load.
If you are paying someone to take care of your children or another person in your household while you work, you might be eligible for the child and dependent care credit," according to Turbotax. "This credit 'gives back' a portion of the money you spend on care, and can reduce your tax bill by hundreds or even thousands of dollars."
Heed the advice below for fulfilling your tax liability while still earning tax breaks, and, yes, your spring splurge will be possible.
The Childcare Tax Credit is a tax credit, not a deduction. This means that it is not a reduction of your income; it is a dollar-for-dollar reduction in your taxes. A deduction just reduces the amount of income that you must pay taxes on. For example, a $1,000 tax deduction might reduce your tax bill by only $150 or $200. A tax credit, however, directly reduces your taxes, dollar for dollar. So a $1,000 tax credit cuts your tax bill by $1,000.
You are allowed to claim up to $3,000 of care expenses for one child and $6,000 for two or more children, and that is your child-care credit. The credit is calculated as 20 to 35 percent of those allowable expenses, depending upon your adjusted gross income. It's important to know that the child and dependent care credit is a tax break specifically for working people — childcare is expensive (read: after-school care), and the cost gives many parents pause about whether it's worth returning to the workforce, so, those who do are given a break.
But wait — if you have wages deducted pre-tax for dependent care expenses or you receive money from your employer for these costs, be sure to deduct these from your allowable expenses. The IRS does not allow for double dipping. Go figure!
Amounts paid to daycare centers, babysitters, nursery schools, and even preschools qualify. To qualify for the child and dependent care credit, you must have paid someone to care for one or more of the following people, according to Turbotax:
- A child age 12 or younger at the end of the year whom you claim as a dependent on your tax return
- Your spouse, if that person is unable to take care of himself or herself and has lived in your home for at least half the year
- Any other person claimed as a dependent on your return, if that person can't take care of himself or herself and has lived in your home at least half the year — these are considered dependent care expenses
The care can take place inside or outside of your home, but in all cases, you will need to obtain a receipt from the care provider showing amount paid and their tax identification number (SSN or EIN). In order to claim the credit, you (and your spouse, if you are married must file jointly) must have “earned income.” This means that you cannot be married and file separately and the income must be earned from a job, not investments.
There are also some other limits. You can claim the credit for money you paid for care as long as the recipient was not your spouse, a parent of the child being cared for, anyone listed as a dependent on your tax return, or your own child age 18 or younger, regardless of whether he or she is a dependent on your tax return. For example, according to Turbotax, you couldn't pay your 17-year-old child to look after an eight-year-old sibling and then claim the credit.
Now that you know a little more about the tax credit for child care and after-school care, and appropriate qualifications for tax breaks each tax year, go ahead and complete Form 2441 with your federal individual income tax return. You will report your care provider’s name, address and tax identification number, as well as any information about your child care. The IRS will be looking for the corresponding income on your care provider’s tax return, so be sure to inform them that you are reporting the expenses paid to them.
I'm Allie Hofer, an HR professional and work-life balance enthusiast. More officially, I’m a Professional in Human Resources (PHR), Society of Human Resource Management – Certified Professional (SHRM-CP), and Recruiter Academy Certified Recruiter (RACR). After having my first child, I opted out of the traditional office setting to work from home. Since then, I have been consulting with organizations in the public and private sectors to support the Human Resources function in recruiting, compensation, training and development, and performance management. I started Office Hours to offer a boutique HR solution for small and medium-sized businesses and to help candidates navigate and completely own their career paths.
This article was written in conjunction with Allie’s business and personal accountant, Brianne Bradley! Brianne is a great advisor to small business owners and provides amazing support not just at tax time, but year round! Please email her at [email protected] for her information.