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Dependent Care Child Tax Credit

Posted by HomeWork Solutions on 7/12/22 3:36 PM
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It’s no secret that childcare is expensive. Many parents around the country can benefit from the Child and Dependent Care Tax Credit to help offset childcare costs. This federal tax benefit assists families paying expenses for the care of eligible children and other dependents so the parents may work, attend school, or look for work.

How it works

The credit is calculated based on your income and the number of qualifying children in your home. The total eligible expenses you can claim are $3,000 for one child and $6,000 for two or more children. The credit you can claim is subject to a phaseout based on your income, and ranges from 50% of eligible expenses for a family earning up to $125k per year to 1% of eligible childcare expenses for a family earning as much as $438,000 per year. Full instructions for calculating your potential tax credit can be found at https://www.irs.gov/instructions/i2441.

For illustrative purposes, let’s assume a family has income of $165,000, two dependent children under the age of 13, and childcare expenses paid to a nanny for after-school care of $25,000. The family has $6,000 of expenses eligible for the tax credit, and their income level dictates that their credit will equal 30% of eligible expenses ($1,800).

What services qualify

Many forms for childcare are eligible, such as nanny care, daycare, and day camp. All service expenses must be trackable and reportable, with documentation available such as a W2 provided to the nanny or invoices from the childcare facility. Documentation of the expenses, including the name, address, and tax identification number (SSN) of the care provider, must be included with your tax filing.

How to claim it

To claim the credit, you will need to complete Form 2441 (Child and Dependent Care Expenses) and file it with your federal income tax return. Each qualifying person needs to have a social security number or valid taxpayer identification number. This tax credit can help lighten the burden of paying for childcare, so be sure you take some time to review the details, and consider speaking with your tax advisor about whether or not you qualify. 

If you plan on hiring a nanny this year, don’t forget to research how to withhold taxes from your nanny’s paycheck, remit them, and stay in compliance with labor and tax laws, too. Not sure where to start? The experts at HomeWork Solutions can help! We have flexible, customizable service plans, so you can find the one that’s right for you.

If you have questions surrounding the Child and Dependent Care Credit, other tax credits, and how it may impact you, we can help with that, too. Contact us today at 1-800-626-4829 or info@homeworksolutions.com to learn more so you are prepared.

Topics: nanny, nanny tax, childcare, agency, senior, CPA

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