There are a number of tax breaks that are available to taxpayers who pay nursery child care costs to work or look for work.
Child-Care Credit
You are eligible for a tax credit if you pay someone to watch your dependent child or children under the age of 13 so that you can be gainfully employed. You must be eligible to claim a dependency exemption for such children. Caution: Do not confuse the child-care credit also, called the child and dependent-care credit, with the child tax credit. Parents eligible for the child-care credit are also usually eligible for the child tax credit—a $1,000 tax credit that is not dependent upon any child-care costs.
The amount of the child-care tax credit is limited to a percentage of qualifying expenses up to $3,000 per year for the care of one child under age 13 and $6,000 for the care of two or more eligible children.
For taxpayers with incomes of $15,000 or less, the applicable percentage is 35%. The percentage is reduced by 1% for each $2,000 of income over $15,000, until the percentage reaches the 20% level for income of more than $43,000.
Qualifying expenses can include the in-home related expenses of a housekeeper, babysitter or cook. If the daycare center cares for more than six children, services performed are allowed only if the center is certified and in compliance with all local laws. Day camps often qualify for the credit. A portion of boarding-school expenses may also qualify for the credit, but fees paid for sending your child to an overnight camp are specifically not allowed.
Employer-Provided Assistance
You may be fortunate enough to work for an employer that provides for tax-advantaged dependent care assistance:
- Up to $6,000 of dependent-care assistance that you receive from an employer-paid nondiscriminatory child care program for employees is completely tax free. The figure is $3,000 for married filing separate income tax returns. The excludable assistance must be for the care of children for whom the child-care credit is available.
- If your employer maintains a so-called cafeteria plan that lets employees choose between receiving fixed amounts of cash or qualified tax-free benefits, the amount you elect to receive for child-care assistance under the plan is tax-free if the benefit provided does not exceed $6,000 ($3,000 for married filing separately).
- Your employer may maintain a flexible spending account. This account allows you to choose to reduce your salary by an amount that is set aside in an account to pay for child-care expenses (up to $6,000 or $3,000 for married filing separately). In effect, such a plan enables you to pay for part or all of your child-care expenses with pre-tax dollars.
If you are provided with some form of employer-provided assistance (other than an outright cash payment of eligible expenses), you may need to consider whether to use the cafeteria plan, flexible spending account, or pay for the care expenses with your own cash and claim a tax credit. If you are in this position, a decision must be made well before the beginning of each year.
For further information about tax planning opportunities, please contact Henssler Financial at 770-429-9166 or experts@henssler.com
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