It’s no secret that child care is expensive. There’s a lot of debate about how we can lighten the burden of the cost of child care moving forward. But one immediate thing parents can do to help offset some of the cost is understanding and leveraging the Child and Dependent Care Tax Credit.
This might go without saying, but in order to take advantage of a tax credit, you need to be paying your nanny “on the books.” If you need help in paying your nanny taxes, check out our guide and reach out to our friends at GTM They’ll help you get everything squared away with your child care provider. When you’re ready to file, here’s what you need to know about the Child and Dependent Care Tax Credit.
What’s a Tax Credit?
A tax deduction reduces the amount of your income you have to pay taxes on. A tax credit is typically a dollar-for-dollar reduction in the amount you owe. So, a deduction is a part of the equation to determine how much you owe, while a credit is an additional subtraction from the result of that equation.
A credit can reduce your tax liability and in some cases could increase the size of your tax refund if it’s a “refundable tax credit.” Like the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC).
What’s the Child and Dependent Care Tax Credit?
If you needed to find help from a babysitter or a nanny so that you could work or look for work, you could qualify to claim the Child and Dependent Care Credit on your taxes.
Do I Qualify for the Child and Dependent Care Tax Credit?
Qualifying Taxpayer
- You (and your spouse if filing jointly) must have earned income during the year.
Exception: Your spouse is treated as having earned income for any month that he or she is: (1.) A full-time student, or (2.) Physically or mentally not able to care for himself or herself. - You incurred child care expenses so that you could work or look for work.
- Your filing status may be single, head of household, or qualifying widow(er) with a dependent child. If you’re married, you must file a joint return, unless an exception applies to you.
Qualifying Child
The child(ren) being cared for must be a dependent who is under 13 years old.
Qualifying Child Caregiver
- You can’t claim the credit if the caregiver was your spouse, a parent of the dependent child, a dependent listed on your tax return, or your child who is age 18 or younger.
- You must report the name, address, and TIN (either the social security number, the Employer Identification Number, or the Individual Taxpayer Identification Number) of the care provider on your return. If the care provider is a tax-exempt organization, you need only report the name and address of the organization on your return.
Qualifying Expenses
- To qualify, you must have incurred these expenses so you could work or look for work.
- You may be able to claim a portion of your nanny’s wages for the Child and Dependent Care Tax Credit.
- If you contributed to a Dependent Care FSA through your employer, expenses reimbursed through that account can not be used for the Child and Dependent Care Tax Credit. The credit will only be applicable to the expenses that exceed your Dependent Care FSA contributions.
For example: if you have two children and contributed $5,000 to a Dependent Care FSA ($5k is the max you can contribute), you could apply $1,000 to the Child and Dependent Care Tax Credit before you hit the $6,000 maximum for the tax credit.
How Much Tax Credit Can I Claim?
For the Child and Dependent Care Tax Credit, you can claim $3,000 in qualifying expenses for one child and up to $6,000 for two or more children.
Families with an adjusted gross income of $43,000 or more typically receive a 20% tax credit on child care expenses, meaning they receive $600 for one child or $1,200 for two or more children. Families with lower income levels can qualify for up to a 35% tax credit.
When Do I Need to File For the Child Care Tax Credit?
The deadline (aka Tax Day 2024) for filing your federal tax return is Monday, April 15, 2024.
- On Form 2441, you must provide your caregiver’s name, address, and Taxpayer Identification Number (in the case of household employees, this would be their Social Security Number).
- Some states may also offer a similar credit for child and/or dependent care.
This tax season, make sure to evaluate if you’re eligible for the credit. 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. Don’t forget that you’re not alone in all of this. GTM Payroll Services is your partner in everything relating to nanny tax and payroll.
