The Child Care Tax Credit is a tax credit offered by the Internal Revenue Service for certain expenses related to caring for dependents. Since it is a tax credit rather than a deduction, you subtract the amount of the credit directly from your tax bill, rather than deducting it from your taxable income.
Eligibility
The Child Care Tax Credit is available to taxpayers who incur expenses taking care of children under 13 in order to work or look for work, according to the Internal Revenue Service. At least some of your income must be from employment or self-employment, as opposed to income from investments. If you are married, you and your spouse must be employed, self-employed or engaged in a full-time course of study. You may also claim this credit for incurring expenses to care for certain adults or children 13 and over who are mentally or physically unable to care for themselves.
Restrictions
The cost of schooling cannot be used in figuring the Child Care Tax Credit--schooling is classified as an educational expense rather than a child care expense, according to Kimberly Lankford of "Kiplinger's Personal Finance." Child care payments to your spouse or someone you can claim as a dependent on your tax return do not qualify. You cannot claim child care expenses paid to your child, even if he is not your dependent, unless he turned 19 before the end of the tax year. The person receiving care must have resided with you for more than half of the tax year. If your employer provides dependent care benefits and you deducted these from your taxable income, you cannot claim these amounts.
Value
You may include expenses for day care, preschool excluding kindergarten, child care provided before or after class, day camp or a babysitter. The maximum credit varies according to how many children were cared for, how much the care cost and your income for the tax year. It is possible under some circumstances to claim up to $3,000 for one child or $6,000 for two or more children. These amounts represent only a percentage of your child care expenses. If your annual family income is less than $15,000, you may claim 35 percent of qualifying expenses. This percentage gradually decreases as income increases--if your income is more than $43,000, you may only claim 20 percent of qualifying expenses.
Forms
In order to claim the credit, you will need to file Form 1040 and Form 2441. You need to name the care provider on Form 2441 and provide the provider's social security number or, in the case of an organization, the employer identification number. You also need to list the amount of the tax credit on Form 1040 and submit both forms to the IRS Service Center that has jurisdiction over your place of residence.
Alternative
If you have a flexible spending account, or FSA, at work that applies to dependent care expenses, it is likely to your advantage to use that instead of the child care tax credit. Your FSA money will be deducted from your paycheck before taxes and will not be subject to federal income taxes or the 7.65 percent social security and Medicare tax, which will likely save you more money than the child care tax credit, according to Lankford. You may also be able to avoid state taxes on this amount, depending on the state you live in.
