Child Care Income Tax Deductions
The Child and Dependent Care Tax Credit (CDCTC) originally went into effect in 1956. The purpose of this act was to help qualifying families recover some of the costs of child care at tax time. If a household pays for child care, they may qualify for a tax credit.
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Qualifications
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To qualify, families must have the following: At least one dependent under the age of 13 who have lived in the household for at least half of the year, two working parents if they are married or one working parent if single (although in some cases one may be a full-time student or mentally incapable of caring for children). The filing status reported on the 1040 form must be single, married filing jointly, head of household, or qualifying widow with dependent child.
Documentation needed
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To file for this credit, you need the name of the individual or company providing the service, the address of the home or facility where the child or children are serviced, and the total amount paid to the provider for the calendar year. This will most likely be included on a W-10 form prepared by the care giver.
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How to file
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Depending on which form is used in tax preparation, two options are available to claim this credit. If an individual files a regular 1040, a form 2441 must be filed as well. In some cases individuals file a 1040A. When this is the case, this credit is reported on a Schedule 2. Specific instructions for these forms can be obtained from the IRS website.
Benefits
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Tax credits differ from tax deductions in that credits directly reduce the taxes you owe, while deductions reduce the amount of income that is taxable. The child care credit can be up to 35 percent of your qualifying expenses, depending on your income, but may not to exceed $3,000 for one child, and $6,000 for two or more children.
Warnings
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Parents who are "married, filing jointly" can only claim the credit if both parents are working. IRS regulations require that the person providing the care not be a spouse, or, if filing single, the other parent of the qualifying child. Also note that if an individual is paid to come to your home to care for a child you may be qualified to be a household employer. In this case, you must withhold Social Security, Medicare, and pay federal unemployment taxes. More information regarding these specifics can be provided by a tax professional.
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