The child-care tax credit can definitely ease the sting of those child-care expenses you shoulder during the year. But it probably won't cover all you spend on the care of your children while you're working or looking for work. Calculating the credit isn't too difficult if you qualify.
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Only certain child-care costs qualify for the tax credit. You can only use costs you incur so you — and your spouse, if you're married — can work or look for a job. Exceptions apply if your spouse is disabled to the extent that he can't care for himself or if he's a full-time student. It doesn't matter if someone cares for your children in your home or at another facility. Both count toward the credit, with the exception of overnight summer camps. You can count day-camp expenses, however.
Your caregiver can't be your spouse, your child's other parent or anyone you can claim as a dependent on your tax return. It can't be your older child unless he's at least 19, even if you can't claim him as your dependent. You must have earned income; if you're filing a joint return with your spouse, this income rule applies to both of you. Your claimed expenses can't exceed the amount of your earned income. If you're married, the Internal Revenue Service goes by whoever's earned income is less.
If your child is age 13 or older, you can't claim a credit for costs related to his care. You must be able to claim him as a dependent on your return, although special rules apply to divorced and separated parents. If you're divorced or separated, speak with a tax professional to find out who gets to claim the tax credit.
The credit doesn't just apply to children. It also covers care for your spouse if he's incapable of self-care or care for another disabled person over the age of 13 who lived with you half the year or more and is eligible to be your dependent. The rules for adults are a bit more complex; if this applies to you, you may want to speak with a tax professional.
Calculating Your Credit
You can use up to $3,000 in care expenses for one dependent, or $6,000 for two or more, when you calculate your tax credit. If you're paying for care for more than one dependent, you can add together the costs for each of them. For example, if you pay $3,500 for one child and $2,000 for the other, you're not limited to $5,000 because the $500 you spent on the first child went over the limit. You can begin your calculations with $5,500 in costs.
Your actual credit is a percentage of your care expenses based on your income. The IRS publishes a chart to help you determine the percentage you're entitled to. The most you can claim is 35 percent of your qualifying costs if your adjusted gross income, or AGI, is $15,000 or less as of the time of publication. As your income rises, your percentage drops, bottoming out at 20 percent if your AGI is more than $43,000.
Claiming the credit involves completing and filing IRS Form 2441 with your tax return. Identify your caregivers along with their Social Security or employer identification numbers, and include the Social Security numbers for your dependents as well. You must file a joint return with your spouse to claim the credit if you're married.