Back to School 2014: Childcare Expenses

Written by Kelly Phillips Erb for

Last night, I had the challenge of being three places at one time. I had to figure out how to get my son to soccer practice, myself to Back To School night for my daughter’s middle school and be home to do homework and watch the kids. It was nearly impossible.

Childcare is a challenge for a lot of parents across the country – and never moreso when it comes to watching kids while parents work. It’s a hot topic these days and it can be somewhat controversial. Fortunately, the tax treatment of childcare expenses is a lot easier to navigate.

The Tax Code allows parents who pay for child and dependent care expenses to claim a credit so long as they meet certain tests:

1. The care must be for one or more qualifying persons. A qualifying person is further defined under the Regulations but for purposes of childcare, your qualifying child is your dependent who is under age 13 when the care is provided (see IRS Pub 503 for more on care for other dependents, including those who are disabled and special rules for divorced parents). To be your dependent, a person must be your qualifying child (generally, a child who lives with you for more than half the year) or your qualifying relative.

2. You must be able to provide the name and Social Security Number (SSN) of the qualifying person or persons. If the qualifying person does not have a SSN, use that person’s Individual Taxpayer Identification Number (ITIN) or Adoption taxpayer identification number (ATIN).

3. You (and your spouse if filing jointly) must have earned income during the year. If you don’t have earned income because you don’t work (see #4 below) or because you claim zero or a loss from self-employment, you can’t claim the credit. In addition to self-employment income, earned income generally includes wages, salaries, tips and other taxable employee compensation. It does not include pensions and annuities, Social Security, workers’ compensation, unemployment compensation or other income not related to work. Child support payments are never considered childcare and do not qualify for the credit.

4. You must make payments for childcare expenses so that you (and your spouse if filing jointly) can work or look for work (exceptions apply for students and the disabled). If you are married and one of you does not work and is not looking for work, you can’t claim the credit. Additionally, if you do not find a job and have no earned income for the year (see #3 above), you cannot take this credit.

5. You do not have to choose the least expensive childcare available. The cost of childcare may be an expense for purposes of the credit even if another care provider is available at no cost – so if your grandmother would watch the kids but you choose to hire a babysitter, you can still use the cost of the sitter to calculate the credit. Additionally, expenses you pay for daycare, nursery school, preschool, or other programs for children below the level of kindergarten qualify for the credit, as do before or after school programs for children under the age of 13. Childcare can be provided in your home or at a school or center.

6. You must make payments for childcare expenses to someone you (and your spouse) cannot claim as a dependent. If your childcare provider is your child, he or she cannot be your dependent and must be age 19 or older by the end of the year. You cannot make payments to your spouse, or the parent of your qualifying person if your qualifying person is your child and under age 13.

7. Your filing status cannot be married filing separately.

8. You must identify the care provider on your tax return, together with a tax ID number.

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Davis & Hodgdon Associates CPAs has been assisting nonprofits, individuals and businesses with tax and accounting services in the Burlington Vermont Metro area for more than 20 years. If you have any questions or concerns please feel free to call 802.878.1963 or email [email protected].

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