The Childcare Credit

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

If you have one or more children under age 13, the government will pay you to work. How? By giving you a credit against your income taxes for the cost of your childcare. Let’s take a look at the history of this credit, and how you can benefit from it.

History: During the Great Depression, the first federal child care subsidies were enacted to allow local governments to hire unemployed teachers and school personnel. These Emergency Nursery Schools continued through World War II. A credit for childcare was first proposed in 1947, but it wasn’t until 1954 that it was included in the Internal Revenue Code. At that time it was part of Itemized Deductions, and therefore mainly available only to the wealthier Americans. In 1976 it was moved from being a deduction to a tax credit, and therefore also available to those who did not itemize.

The credit amount is between 20 to 35 percent of qualified expenses, with a maximum of $3,000 for one child or $6,000 for two or more. There is a catch, however (this is the IRS): both eligible parents must have earned income, as opposed to unemployment benefits or investment income like rents or interest. The calculation is based upon the spouse with the least amount of income. There is an exception to the earned income requirement: if the spouse was either a full-time student for five months of the tax year or was physically or mentally incapable of self-care. (If you are unemployed and looking for work, shouldn’t this be allowed as ‘earned income’? Why not ask your Congressional representative.)

This childcare provider can work in your home, their home, or the daycare facility. To claim the credit, you will need:

1. The provider’s Social Security number or federal identification number (Get a copy.)
2. Their address and phone number
3. The total you paid during the calendar year

(I can’t tell you how many people do not know the address of the daycare facility: ‘It’s about two miles down on Main Street, next to the corner shop with the green curtains.’ To which I reply, ‘This is the address of where you leave your children? YOUR children?’ ‘Do you know the phone number?’ ‘Are you sure they are still there?’)

Expenses that are considered in the computation include the cost of daycare, before- and after-school programs, and nanny care. These expenses include fees paid to an agency to get a care provider, deposits to an agency or pre-school, application fees, and other indirect expenses that are work-related if you have to pay them to get care, even though they are not directly for care. However, a forfeited deposit is not for the care of a qualifying person if care is not provided.

Expenses that are not eligible include paying your teenager to babysit, or sending your child to a private elementary school.

Your employer may offer a Dependent Care Flexible Spending Account where you can contribute up to $5,000 of pretax money and use it to pay for your childcare. If you have the option, using your Flexible Spending Account (FSA) at work may be more beneficial if you and your spouse make more than $43,000, and each of you earns more than the childcare costs. If you earn less than $43,000, or are a single parent, the credit might be better. (I suggest checking with your tax preparer to determine which way would be better for you.)

• Tip 1: This credit is not just for the care of your dependent child; it can also be for a parent or other persons who were not physically or mentally able to care for themselves.
• Tip 2: In the year your child turns age 13, you can claim the credit until his or her birthday. (For example, you can claim summer camp if your child turns 13 in September.)
• Tip 3: You can count work-related payments you make to relatives who are not your dependents, even if they live in your home! (Excluded is your older child who was under age 19 at the end of the year or a person who was your spouse any time during the year.) If you pay someone to come into your home and care for your dependent, you may be a household employer and responsible for employment related taxes such as workers’ compensation, workers’ disability, and unemployment insurances, but you can count their meals as work-related expenses.
• Tip 4: If you are a statutory employee, and file a Schedule C, the amount shown on your W-2 is the earned income amount, not after expenses.

Some No-nos:

1. Childcare expenses while performing volunteer work are not eligible for the credit (but they are eligible as charity!)
2. Childcare expenses while you go out for dinner are not eligible for the credit.
3. If married, you must file a joint return (unless legally separated).
4. If divorced and claiming the exemption for a child who does not live with you, you cannot claim this credit – but your ex can. (Sorry)
5. The payment must be made by you – not your employer, grandparents, or in-kind work so your child can attend for free.

If you are not sure if a payment is deductible, call the tax preparer now. The phone lines are open.

Enjoy your week.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.