Child Care Deduction Vs. Credit

Child care tax credits offset some of the costs of daycare while deductions are given to reduce taxable income.

Child care tax credits offset some of the costs of daycare while deductions are given to reduce taxable income.

The Internal Revenue Service (IRS) offers many incentives for parents, including childcare credits and deductions. This much-needed financial boost is often welcomed by new parents eager to offset the staggering cost of their bundle of joy. A childcare tax credit pays them back for money spent on child services. A deduction reduces their taxable income if they spent money on things like adoption, student loans, tuition and specialty camps. Child support and foster parent income do not come with tax consequences, and are not considered income.

Child Care Credit

As of 2012, parents could claim childcare expenses of up to $3,000 for one child or $6,000 for two or more. That amount is returned to them as a tax credit. The credit applies if you're both working or actively looking for work at any time during the tax year. It also applies if your child was enrolled in private kindergarten. As is always the case with the IRS, a few stipulations apply. The child must be under 13 at the time of the care; older children must be physically or mentally handicapped or otherwise incapable of self-care.

Child Care Deductions

The IRS has several deductions for mom and dad. Parents who adopt a child during the tax year can deduct a portion of the adoption costs. If you get child support or help raise foster children, you don't have to report any of that income to the IRS. Parents saving for college should be relieved to know things like pre-paid tuition plans, state college savings plans (529 accounts) and student loan interests are also deductible.

Battle of the Forms

Depending on if you're applying for a deduction or credit, you'll need to fill out an IRS form. Parents seeking the childcare credit must fill out Form 2441, while those pursuing childcare deductions need to list everything on Schedule A of Form 1040. Of course, parents can apply for both.

Phase Outs

The more money you earn, the less you get back with either a credit or deduction. The childcare credit begins to diminish, or phase out, when parents earn $11,000 per year or more. If mom and dad file separately, the phase out begins when income reaches $55,000. Income levels affecting childcare deductions are much higher. In fact, as of 2013, the IRS planned to phase out deductions for itemized childcare expenses for couples earning $261,650 together or if one made $174,450 a year.

About the Author

Stephanie Reid has been writing professionally since 2007, with work published in the Virginia Bar Association's "Family Law Quarterly" and the "Whittier Journal of Child and Family Advocacy." She received her Juris Doctor from Regent University and her Bachelor of Arts in French and child development from Florida State University. Reid is admitted to practice law in Delaware and Maryland.

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