When it comes to saving for retirement, you know one thing to be true: more is always better. While this may be the case, some people don’t have enough time or earn enough money to reach their goals.
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If you paid someone to care for your child, spouse, or dependant so that you or your spouse could work or look for work, you may be able to reduce your tax by claiming the Child and Dependant Care Credit on your federal tax return.
Below are the top things to know about taking the child and dependant care credit:
- You must have paid for care for one or more qualifying persons. A qualifying person is your dependant child under age 13. Also, your spouse and certain other individuals who are mentally or physically unable to care for themselves may also be qualifying persons. You must identify each qualifying person on your tax return.
- The care must be provided so that you and your spouse could work. Full-time or part-time positions qualify as work.Actively looking for work also qualifies as work, but you must have earned income for the year to take the credit. For example, if you pay for child care while looking for work but do not find a job, you cannot take the credit if you have no earned income for the year.
- Earned income is considered to be wages, salaries, tips, or income from self-employment. Income from pensions, social security, worker's compensation, interest and dividends, unemployment benefits, child support and alimony, nontaxable workfare payments, income earned while an inmate in prison are not considered to be earned income.
- You, and your spouse if married, must have earned income or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student, or if they were physically or mentally unable to care for themselves.
- You must identify the care provider on your tax return. The care provider cannot be your spouse, someone you can claim as your dependant on your tax return, or your child under age 19 even if the child is not your dependant. The care provider cannot be your child's other parent if the child is under age 13. However, a person who is your relative but not your dependant may be a qualifying care provider even if they live in your home.
- Individuals whose tax status is married filing separately cannot take the child and dependant care credit. Your filing status must be single, married filing jointly, head of household, or qualifying widow or widower with a qualifying child.
- The qualifying child must have lived with you for more than half of the tax year. A spouse or other dependant who is disabled must also live with you for more than half of the tax year.
- The credit can be for up to 35% of your qualifying expenses, depending on your income. The credit for those who have an adjusted gross income of $15,000 or less can take the full 35% as long as the credit doesn't exceed the maximum dollar amount discussed below. The credit is reduced by one percentage point for each additional $2000 increment of AGI. The credit is 20% for taxpayers whose AGI is more than $43,000.
- For tax year 2008, you can use up to $3,000 of expenses for one qualifying individual or $6,000 for two qualifying individuals, depending on your income. But the amounts don't have to be divided equally among your qualifying dependants. For example, if one child's care is $2800 and the other child's care is $3200, you may still take the full $6000 credit. The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income.
- If you pay someone to come to your home and care for your dependent 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 and pay federal unemployment tax. Usually, you are not considered a household employer if the care provider works from their own home or business. For information, see Publication 926, Household Employer's Tax Guide.
For more information on the Child and Dependent Care Credit, see Publication 503, Child and Dependent Care Expenses. You may download these free publications from www.IRS.gov or order them by calling 800-TAX-FORM (800-829-3676).
Publication 503, Child and Dependent Care Expenses (PDF 167K)
Form W-10, Dependent Care Provider’s Identification and Certification (PDF 31K)
Form 2441, Child and Dependent Care Expenses (PDF)
Form 2441 Instructions (PDF 32K)
Publication 17, Your Federal Income Tax (PDF 2,075K)
Tax Topic 602
Disclaimer: This article is intended for informational purposes only; please check out the IRS website or seek a competent tax professional if you need further assistance with your personal tax situation.
Internal Revenue Service