December 19, 2024
Having dependent children is rewarding, but often costly. Among the many expenses parent(s) incur is child care. Families with dependent child(ren) are eligible for federal tax child care benefits such as “tax credits” and “employer-provided income exclusion / non-taxable fringe benefit”.
The following is an explanation of the tax breaks for each Child Care items.
Tax Credits:
Child and dependent care credit - nonrefundable.
You may be able to claim the credit if you pay someone to care for your dependent who is under age 13. To qualify you must pay these expenses so you (or your spouse if filing jointly) can work or look for work. In order to claim the credit, the child must live with you for more than half the year. This rule does not apply if the spouse is disabled or a full-time student.
The credit is computed by using the lowest amount:
a) $3,000 per dependent / $6,000 for two or more dependents
b) Actual work-related care expenses (see “Qualifying child-care expenses”)
c) Your earned income
The lowest amount would then be multiplied by the applicable percentage between 20% to 35% to get the amount of credit. The percentage depends on the income amount.
Qualifying child-care expenses:
The expenses must be for the purpose of directly related to the time needed for child and dependent care.
e.g. Qualifying child-care expenses included the in-home related expenses of a housekeeper, babysitter or cook. Services performed by a certified dependent care center that is in compliance with all local laws also qualify. A day camp and a portion of boarding-school expenses may qualify. Non-certified dependent service care center and overnight camp fees are not allowed.
The credit is allowed for part-time employment, too.
Child tax credit
Parents eligible for the child and dependent care credit are usually also eligible for the child tax credit. The child tax credit may claim a $2,000 tax credit for each qualifying child who has a Social Security number, and that the child must be under the age of 17 at the end of the year. Credit for Other Dependents in the amount of $500 is available for all other dependents.
The total credit amount claimed by a taxpayer may be reduced or phased out if the taxpayer's modified adjusted gross income exceeds a threshold amount based on the taxpayer's filing status. For 2024, the threshold amount is $200,000 ($400,000 if filing a joint return). The credit amount will be reduced by $50 for every $1,000 above the threshold. For example, if you have one child, once your income exceeds the threshold by $40,000, no credit will be awarded.
Employer-provided assistance:
If you receive any dependent care benefits from your employer during the year, you may be able to exclude all or part of them from your income. In addition, some taxpayers may be able to take advantage of flexible spending account (FSA) programs enabling them to make tax-free contributions that can be used to pay child-care expenses. Here are a few of the details:
Up to $5,000 of dependent-care assistance that you receive from an employer-paid nondiscriminatory child-care program for employees is completely tax free (the figure is $2,500 for married filing separate income tax returns). The excludable assistance must be for the care of dependent children under age 13, or the employee’s dependents or spouse who are physically or mentally unable to care for themselves.
If your employer maintains a so-called cafeteria plan that lets employees choose between receiving fixed amounts of cash or qualified tax-free benefits, the amount you elect to receive for child-care assistance under the plan is tax-free if the benefit provided doesn't exceed $5,000 ($2,500 for married filing separately).
Your employer may maintain a flexible spending account that essentially allows you to choose to reduce your salary by an amount that's set aside in an account set up to pay for child-care expenses (up to $5,000 or $2,500). In effect, such a plan enables you to pay for part or all of your child-care expenses with pre-tax dollars.
If you are provided with some form of employer-provided assistance other than an outright cash payment of eligible expenses, you may need to consider whether to use the cafeteria plan or flexible spending account or pay for the care expenses with your own cash and claim a tax credit. If you are in this position, a decision must be made well before the beginning of each year.
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