How Taxes Can Help With Child Care Costs

The cost of childcare can be a burden for many families; many parents elect to put their children in full-time care as infants and toddlers and in part-time care when they are of school age. The good news is that tax credits may be available to offset your out-of-pocket costs.

Understanding the Childcare Tax Credit

In Virginia, the average cost of child care during 2014 was $10,028 for an infant, nearly $8,000 for a child four years old and nearly $6,000 for a school-aged child. The childcare tax credit can provide some relief. Unlike a standard deduction, a tax credit reduces your overall tax burden and will not increase your refund as they are non-refund items. Naturally, like all tax credits, there are restrictions including:

• Filing status – you must file as either joint taxpayers, head of household, qualifying widow(er) or single with a child. In order to claim this credit, you must have a job. The child whom you claim the credit for needs to be 12 years old or younger. You also must claim the child as a dependent; couples who are divorced and share custody will have to determine which individual should claim the credit.
• Caregiver information – caregivers cannot be a parent or sibling. When completing your tax return, you will have to provide the caregiver’s information including their name and tax ID information. If care is given as part of preschool or nursery school, you may only claim the portion of the credit that applies directly to daycare versus schooling.
• Income based credit – you can claim the childcare tax credit only if your income meets the criteria.  Only a portion of your expenses may be claimed and this portion is reduced depending upon your total income. Your tax professional can help you determine what portion you are entitled to claim.

Today’s families often face a struggle between providing high-quality care for their children and paying for the best care. The childcare tax credit can help reduce the final cost of your care.

Be Mindful of Other Restrictions

Those who are considering using the childcare tax credits to reduce their total childcare costs should also be mindful of other restrictions. For example, if your employer offers an on-site daycare facility, your credit may be reduced. Families who utilize flexible spending accounts (FSA) may also have to reduce their claimed costs.

Rue & Associates is available to help with all your tax planning and preparation needs. If you believe you are currently eligible or may be eligible for the childcare tax credit, we can help you determine what percentage of your expenses are eligible and we may also help you determine whether there are better options for reducing your overall childcare costs. Contact us today!