Many parents who work or are looking for work must arrange for the care of their children during school vacation. If you are in this situation and your children requiring care are under 13 years of age, you may qualify for a child care tax credit. The credit offsets income tax, potentially to zero, but cannot be used to reduce special taxes, such as self-employment tax, and is not refundable.
Here are some facts that you need to know about the Child and Dependent Care Credit, that is available for expenses incurred during the lazy, hazy days of summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent in order to qualify to claim the credit (an exception is made for divorced or separated parents).
- 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.
- Day Camps – The costs of day camp generally count as expenses towards the child and dependent care credit. A day camp or similar program may qualify, even if the camp specializes in a particular activity, such as soccer or computers. As with day care facilities, if more than six persons are cared for in return for a fee at the day camp, compliance with applicable state and local laws is required.
- Overnight Camp or Tutoring – No portion of the cost of an overnight camp or a tutoring program is a qualified expense.
- School Expenses – Only school expenses for a child below the level of kindergarten will qualify for the credit. After-school and before-school care expenses may qualify.
- In Home Care – If your childcare provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns. The employment taxes that you pay count as qualifying child and dependent care expenses.
- Credit Percentage – The actual credit can be between 20 and 35 percent of your qualifying expenses, depending upon your income. The higher your income, the lower the credit percentage. The top rate will decrease from 35 to 30 percent after 2012 unless Congress takes action.
- Maximum Qualifying Expenses – You may use up to $3,000 of the unreimbursed expenses paid in 2012 for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit. Doing so will result in a tax credit of between $600 and $1,050 for one child and $1,200 and $2,100 for two or more children, depending upon your income. Absent action by Congress, the limits on qualifying expenses will drop to $2,400 and $4,800, respectively, after 2012, making the credit range from $480 to $720 for one qualifying individual and $961 to $1,440 for two or more qualifying individuals. If the qualifying care expenses exceed your work earnings, use the earnings to determine the credit. Dependent care benefits received through your employer will also affect the computation of the credit and may result in no longer qualifying for the Child and Dependent Care Credit.
- Records Required – In order to claim the credit on your tax return, you will need to provide the child or dependent’s social security number and the care provider’s name, address and tax ID number. No credit is allowed without that information. If you have more than one child, you must also show the expenses paid for each child, up to the $3,000 ($2,400 after 2012) maximum amount determined per child. If your state allows a child care credit, additional information, such as the care provider’s phone number, may be required.
For more information regarding how this credit will affect your particular circumstances, or for information about claiming this credit for your spouse or a dependent age 13 or over who is not able to care for himself or herself, please call this office.