In today’s society, two income families are the norm. Both parents have to work to pay the bills. That means the children need to be looked after by a trusted third party. The government wants to reward those dedicated parents at tax time.
Child care is expensive. Whether you hire a nanny, utilize a day care center, or have a trusted friend or family member watch your child, the costs can add up quickly. However, some of the money that is used towards child care expenses throughout the year can be credited back to parents and guardians with the child and dependent care credit.
The child care credit can be claimed by qualified parents or guardians that have paid for the care of a dependent child. The dependent child must be under the age of thirteen to be considered for the credit. As a qualified dependent, the child has to have lived with you in the residence for at least half the year.
To claim the credit, the dependent child has to be listed as an exemption on your tax return. This can be an issue for separated or divorcing couples where one spouse has moved out the primary residence. If only one parent has custody of the dependent in question, that parent is the one allowed to claim the child care credit. When the non-custodial parent was the one footing the bill for child care expenses, a form, Form 8332, gives permission to that parent to claim the child as an exemption and benefit from the child care credit.
Child care credit can not be claimed for private school tuition. This falls in the category of educational concerns and can be deducted there. But, if the child attends after school care at the school, a portion of that expense can be applied to the child care credit.
Dependent care spending accounts are not against the rules when applying for the child care credit. One thing that is often misunderstood is how the money in a dependent care spending account is reported on the tax forms. This money is used to pay child care bills, but it is done on a tax-free basis. As such, it cannot be applied to the child care credit. You have already benefited from the employer reducing your taxable income and providing tax-free money for child care expenses.
Parents who are in this situation can still claim the child tax credit, but not a dependent care credit. Any expenses over and above the amount that was set aside in the dependent care plan are eligible for the child care credit. The credit received can be anywhere from twenty to thirty-five percent of the total amount of money spent on child care.
The child care credit is a good thing for those parents who have struggled to keep their children in day care. They can claim a child tax credit and also the child care credit for the money they put into their children’s care.