A taxpayer can claim a nonrefundable child and dependent care tax credit if someone is paid by the taxpayer to watch his under-age-13 dependent child or children (who are eligible to be claimed as dependents of the taxpayer) so that the taxpayer 
can be gainfully employed. The credit is allowed to enable part-time employment, too, but qualifying expenses must be directly related to the time needed for dependent care.
Qualifying child care expenses can include the in-home related expenses of a housekeeper, babysitter or cook. Services performed by a dependent care center are allowed only if the center is certified and in compliance with all local laws. A portion of boarding-school expenses may qualify for the credit and the cost of a day camp qualifies, even if it specializes in a particular activity, such as soccer. Expenses that do not qualify include the cost of schooling for a child in kindergarten or above, overnight camps, summer schools, or tutoring programs.
To claim the credit on your IRS tax return, you must provide the care provider’s name, complete address, amount paid, and the providers EIN (employer identification number) or SSN (social security number). The IRS requests this information to remind the provider that this income must be reported on their tax return.
The proper credit amount is equal to the amount of qualified child care expenses multiplied by an applicable percentage determined by the taxpayer’s adjusted gross income (AGI). The amounts for 2012 and 2013 appear below:
For 2012:
- Maximum qualifying child care expenses for one child: $3,000
- Maximum qualifying child care expenses for more than one child: $6,000
- Applicable percentage for taxpayers with AGI of $15,000 or less: 35 percent*
- Applicable percentage for taxpayers with AGI over $43,000: 20 percent
*For taxpayers with incomes of between $15,000 and $43,000, the applicable percentage is reduced by 1 percent for each $2,000 of income over $15,000 until the percentage reaches the minimum 20 percent level for income or more than $43,000. The 1 percentage point decrease applies even if the taxpayer’s income is just a fraction over the previous level. For example, if a taxpayer has an income of $15,002, the applicable percentage will be reduced to 34 percent.
For 2013 (unless raised by Congress):
- Maximum amount of qualifying child care expenses for one child: $2,400
- Maximum amount of qualifying child care expenses for more than one child: $4,800
- Applicable percentages for taxpayers with AGI of $10,000 or less: 30 percent
- Applicable percentage for taxpayers with AGI of over $28,000: 20 percent
If you work for an employer that provides for tax-advantaged dependent care assistance, that may result in taxable income. However, there is an exclusion available, and some taxpayers may be able to take advantage of programs enabling them to make tax-free contributions of up to $5,000 that can be used to pay child care expenses. 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 or flexible spending account or pay for the care expenses with your own cash and claim a tax credit.
The author wishes to thank the National Society of Accountants and CCH Incorporated for their contributions.
Please be sure to read the disclaimer page on our blog. This blog is for educational purposes only and should not be considered as the rendering of tax advice.
