The Rules for Deducting Childcare Expenses

Raising children is expensive, especially if you have to pay for child care so that you can go to work. The Internal Revenue Service offers a variety of tax breaks that can ease the financial burden of raising a family. The Child and Dependent Care Credit is a tax break that can allow you to save as much as $6,000 on child care expenses.

Deducting Dependent Care Expenses

Many of the tax breaks the IRS offers are tax deductions that reduce taxable income. The term "tax deduction" is sometimes used to refer to any tax rule that reduces the amount of tax you owe, but the tax break for child and dependent care expenses is technically a tax credit. A tax credit directly reduces the total amount of tax you owe instead of reducing taxable income. Tax credits are more powerful than tax deductions of equivalent size. For example, if your income tax rate is 25 percent, a tax deduction of $1,000 saves you $250 in taxes. On the other hand, a tax credit of $1,000 results in $1,000 less in taxes regardless of your income tax rate.

The Child and Dependent Care Credit tax credit applies only if you pay for child care so that you are able to go to work or look for work. If you are married, your spouse must also work or be a full-time student for at least five months of the year for you to qualify for the dependent care deduction. The tax credit is capped at $3,000 in child care expenses if you have one child and $6,000 if you have two or more children. In addition, the credit cannot exceed the lesser of your and your spouse's earned incomes. In other words, if your spouse earned $5,000 last year, your maximum credit is limited to $5,000 even if you have two eligible children.

Exceptions to Child Care Tax Credit

To take the Child and Dependent Care Credit, your child must meet IRS rules for "qualifying individuals." The IRS says that a qualifying individual is a dependent who was under age 13 when he received care or a dependent who was physically or mentally incapable of self-care and lived with you for at least half the year. Dependents can be your own biological children or relations like siblings, nieces, stepchildren and grandchildren that are under your care.

If you qualify for the child care tax deduction, the IRS won't give you the tax break you are due unless you claim it on your tax return. You can claim the Child and Dependent Care Credit by completing Form 2441 and submitting it with your tax return. If you claim the credit, you must use Form 1040 or Form 1040A to file your tax return, meaning you can use Form 1040EZ, which is reserved for simple tax returns.

2018 Changes to Tax Credits

Fortunately, the Tax Cuts and Jobs Act kept the child tax credits intact. You'll follow the same procedure in 2018 that you followed in 2017.

Claiming the Credit in 2017

To claim the credit on your 2017 taxes, you'll need to use Form 2441: Child and Dependent Care Expenses. You'll need to know the name, address and Social Security numbers of any caregivers you used during the tax year, as well as the amount you paid for the care.

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