The word "care" in the child care tax credit is a misleading trick of the English language. "Care" could refer to treating a sick child, or it could refer to babysitting. In the context of the Internal Revenue Service's child care tax credit, it refers to babysitting. You can take a tax deduction for your child's medical care as well – including insurance premiums you pay on her behalf – but the credit applies only if you pay someone to watch your child while you're at work.
Deductions Vs. Credits
Tax deductions and tax credits both reduce your bill to the IRS, but credits do a better job of it. If you look at the second page of your 1040 tax return, you'll see that itemized deductions are subtracted on line 40 to help determine your taxable income on line 43. Deductions lower the amount of income you must pay taxes on. After you compute the tax you owe on line 44 of your return, you can then subtract any credits you're eligible for from this number. Credits reduce your tax bill dollar for dollar.
Child Care Credit
The tax break you get for paying for child care is a credit, but it's subject to a few rules. Your child must be under age 13 to qualify – the IRS thinks teenagers are perfectly capable of taking care of themselves unless they're disabled. You can only count what you pay toward child care so you and your spouse can work or look for work, although if one of you is a full-time student or disabled and you file a joint return, this is OK. You have to have earned income; passive unearned income won't do. You can count up to $3,000 in child care costs for one child or $6,000 for two or more children as of 2013. The credit is a percentage of these costs, based on your adjusted gross income. If your AGI is $43,000 or more, you're entitled to a credit of 20 percent. Therefore, if you have one child and $3,000 in qualified child care expenses, your credit is $600.
Health Insurance Deduction
Taking a deduction for health insurance premiums isn't usually as advantageous – and not just because this is a deduction and not a credit. It's an itemized deduction, so you have to complete Schedule A to claim it. It's limited to costs that exceed 10 percent of your AGI as of 2013, although you can add in any unreimbursed medical expenses as well. For example, if your AGI is $60,000, and if all your premiums and other medical and dental costs add up to $5,000 for the year, you can't claim the deduction – $5,000 is less than 10 percent of your AGI. If you had $6,500 in qualifying costs, your deduction would be $500. You can only count premiums you pay for personally. If your insurance is a perk of your employment and your boss pays for any or all of the premiums, you can't claim a deduction for these portions.
Single or Divorced Parents
The health insurance deduction has one advantage over the child care credit if you're divorced or single. To qualify for the credit, you must be your child's custodial parent – she must live with you, not your ex, more than half the year. You can claim a deduction for insurance premiums and other medical costs you pay for your child even if you're not the custodial parent.
- TurboTax: Tax Exemptions and Deductions for Families
- CNNMoney: Fiscal Cliff Protects Family Tax Breaks
- Kiplinger: FAQs on the Child Care Tax Credit
- IRS: Child and Dependent Care Credit
- Kiplinger: Tax Credit Vs. Tax Deduction
- Maloney & Novotny: Tougher New Rule for Medical Expense Deductions Starts This Year
- IRS: Form 1040 (PDF)
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