To help working parents afford rising day care costs, Congress enacted the Child and Dependent Care Credit. The credit allows working parents to reduce their tax liabilities by 35 percent of their qualifying child care costs, limited to $3,000 for one dependent or $6,000 for more than one. Whether you paid your day care provider by cash or check is irrelevant, as long as you substantiate your expenses and identify your child and provider on your tax returns.
As a credit, dependent care costs are not deductible, and taxpayers with qualified care expenses receive larger tax benefits from the credit than they would for a deduction. The Internal Revenue Service (IRS) requires you to look for available work, actually work or attend school to qualify for the day care credit. Furthermore, if you are married, you must file your taxes jointly to qualify for the tax credit. Married taxpayers who file their taxes individually are not able to claim the credit.
Definition of Qualifying Child
You must incur your child care expenses to obtain care for a qualifying child. According to the IRS, a qualifying child is your natural child, an adopted or foster child, grandchild or any other dependent child that you claim as such on your tax returns. Furthermore, the IRS requires that your dependent child be 12 or younger when you incurred your child care expenses, and your qualifying child must have resided with you for at least six months during the tax year. You must provide your child's Social Security number on your annual tax return to receive the credit.
The IRS allows taxpayers to pay their child care providers using cash or by check. However, you must provide your child care provider's employer identification number or Social Security number on your tax return. The IRS also limits who can provide care to your qualifying child for you to remain eligible for a child care tax credit. You cannot pay your spouse, your child's other parent if unmarried or another one of your children who is under 19, while remaining eligible for the tax credit. However, you can pay your parents, in-laws or any other relatives, and the care may be provided in your home, outside of your home or in a day care facility.
Phase-Out Rules and Credit Amounts
The child care credit phases out for taxpayers with an adjusted gross income exceeding $15,000. Taxpayers with an annual adjusted gross income of up to $15,000 can claim 35 percent of their child care expenses, limited to $3,000 per child or $6,000 for more than one child. At $43,000, the IRS limits the credit to 20 percent of incurred expenses or $3,000 for one child or $6,000 for two or more children.
You may claim the credit using IRS Form 2441, Child and Dependent Care Expenses, and you must attach it to your 1040 tax returns. You cannot use Form 1040-EZ to claim the credit. The IRS requires that taxpayers reduce their child care expenses by any benefits received from their employers. For instance, if your employer reimburses his employees for their day care expenses, you cannot receive a credit on the amount reimbursed.