TAX BENEFITS AVAILABLE FOR CHILDCARE EXPENSES

Sarah McCraine, CPA

As parents excitedly plan for the arrival of a new addition, they may be in for a bit of a surprise when they calculate the cost of childcare. According to 2015 data from Child Care Aware of America, the cost of full-time infant childcare can take up as much as 15% of median family income. Currently there are two tax benefits that parents may consider using towards their childcare expenses.

The first is the Child Dependent Care Credit, a nonrefundable tax credit of up to 35% of qualifying childcare expenses. Qualified expenses are those paid for an in home sitter, summer camps, daycare center, or a before and after school care program. One item of note is that overnight camps are not considered a qualified expense. Parents can elect to use expenses paid up to $3,000 for one child or up to $6,000 for two or more children in the calculation of the credit. In addition to having qualified childcare expenses, parents must meet the following tests.

  • Taxpayer(s) filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.
  • If filing jointly each spouse must have earned income, a spouse can be considered to have earned income if they were a full-time student or were physically or mentally unable to care for themselves.
  • Care must have been provided in order to allow the taxpayer and spouse to work or look for work.
  • Care has to be provided for dependents age 13 or younger or other qualifying persons who have lived with the taxpayer for over half the year.
  • Care cannot be provided by a dependent.
  • Any expenses used in calculation of the Child Dependent Care Credit are reduced by benefits provided by an employer.

More information about the Child Dependent Care Credit can be found in IRS Pub. 503.

The second benefit that may be available to some parents is the use of a Flexible Spending Accounts. An FSA is a benefit offered by employers that allows an employee to contribute up to $5,000 of pre-tax dollars for childcare expenses. These contributions allow parents to recognize a tax savings by reducing their taxable income. In some cases parents may be able to utilize both an FSA and still qualify for the Child Dependent Care Credit. However, as mentioned above the use of an FSA will reduce qualified expenses that can be used towards the calculation of the Child Dependent Care Credit.

As parents research their best options in using tax benefits to help aid in the cost of childcare, there is one item of consideration. Parents who elect to hire a babysitter as their qualified childcare expense, will need to take into consideration that they are hiring a household employee. Hiring a household employee does come with additional tax considerations. Currently taxpayers who pay wages of more than $1,900 in a calendar year or more than $1,000 in a quarter are required to withhold Social Security and Medicare (FICA). They are also responsible for paying the matching portion of FICA, and possibly federal and state unemployment insurance taxes. These additional expenses need to be weighed by parents as they consider using the tax benefits for childcare expenses.

More information for tax treatment of household employees can be found in IRS Pub. 926.

Finding affordable, quality childcare can be an arduous process that is not a one size fits all scenario. However tax benefits are available, and if questions or concerns arise, parents should consult a trusted tax advisor.

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