Workers who pay for child or dependent care get a break at tax time -- a federal tax credit that returns up to 35 percent of eligible expenses. ("Eligible" is IRS language for "some but not necessarily all.") Unlike many tax breaks that phase out at higher incomes, this one is available to all qualifying taxpayers, regardless of their income. However, the exact amount of your credit is tied to your income.
If you pay someone else to watch your children or other dependents while you work or look for work, you may be eligible for the federal child and dependent care tax credit. This credit directly reduces your tax bill -- so a $500 credit, for example, means you pay $500 less in taxes. Internal Revenue Service Publication 503 spells out exactly which expenses are eligible for the credit. In general, though, if you are paying for care for one person, you can apply up to $3,000 of those expenses toward the credit. If you're paying for the care of two or more people, you can apply up to $6,000 in expenses.
Basis of Credit
IRS Form 2441 guides you through the process of calculating your credit. There's some math here, so get a pencil. First, you add up your earned income -- that is, all income you received from work during the year. Then, if you're married and filing a joint return, you calculate your spouse's earned income for the year. (Married people who file separately can't claim the credit at all.) Take the smaller earned income and compare it to the amount of your eligible dependent care expenses. Whichever of those figures is smaller, that's what you'll be basing your credit on. The point of all this math is to keep people from claiming a credit based on more money than they actually made at their job. If one spouse had, say, just $400 in earned income and the couple claims $6,000 in child-care expenses, as far as the IRS is concerned, it would be cheaper for everyone involved (including the government) for that spouse to stay home and watch the kids.
Here's where your income comes into play. Before you fill out Form 2441, you're supposed to fill out the first part of your tax return to determine your adjusted gross income. Form 2441 sends you back to your return to get that number. There's a little table on the face of Form 2441. Find the percentage that corresponds to the range of your adjusted gross income. Multiply your eligible child and dependent care expenses by that percentage, and the result is your tax credit.
As of 2012, the maximum credit was 35 percent of eligible care expenses. Taxpayers with adjusted gross incomes of $15,000 or less were eligible for the 35 percent credit. If you had $12,000 in income, for example, and $800 in eligible child care expenses, then, your credit would be 35 percent of $800, or $280. For taxpayers with incomes of more than $43,000, the percentage was 20 percent, with no upper income limit. So whether you had income of $44,000 or $440,000, your credit would be 20 percent. If you had $2,000 in care expenses, that translates to $400. For taxpayers with incomes between $15,000 and $43,000, the percentage gradually decreases from 34 percent to 21 percent.
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