Single parents and two-career couples must find ways to care for their young children while they work. The tax code provides a way for parents to recoup some of their expenses for child care through a nonrefundable tax credit. This credit is also available to taxpayers who care for disabled dependents and spouses.
If you paid expenses for the care of a qualifying child, you may be eligible to claim a tax credit.
To claim the child and dependent care credit, you must meet the following requirements:
You and your spouse generally must file a joint return.
The care must be provided so that you (and your spouse, if married) can work or look for work.
You must have some earned income. If you’re married and living together, both you and your spouse must have earned income (unless one of you is a student or disabled).
You and the person(s) for whom the care is being provided must live in the same home.
The person who provides the care can’t be your spouse, the parent of your qualifying child under age 13, or a person whom you can claim as a dependent. If your child provides the care, he or she must be age 19 or older by the end of 2007.
You and your spouse can claim the credit even if you’re not filing a joint return if you meet the following requirements:
You paid more than half the cost of maintaining a household for the year that was the principal residence of both you and the qualifying person for more than half the tax year, and
Your spouse wasn’t a member of the household during the last 6 months of the tax year.
To claim a credit for qualified expenses (defined below), the care must be provided for one or more qualifying persons.
Qualifying persons include:
A dependent who is a qualifying child and who hasn’t reached his or her 13th birthday when the care is provided. Generally, you must be entitled to claim the child as a dependent, but an exception applies for children of divorced or separated parents.
A dependent of any age who is physically or mentally incapable of self-care and who has the same principal residence as you do at the time the care is provided.
A spouse who is physically or mentally incapable of self-care and who has the same principal residence as you do at the time the care is provided.
Exception: In the case of divorced or separated parents, the child is the qualifying child of the custodial parent for purposes of this credit, even if the noncustodial parent claims the child as a dependent.
Qualified-child or dependent-care expenses are those incurred for the primary purpose of assuring the wellbeing and protection of a qualifying person while you work or look for work.
Qualified expenses include the following:
Expenses for care provided outside the home for the qualifying child, disabled dependent, or disabled spouse can be counted provided the qualifying person regularly spends at least eight hours each day in your home. If the care is provided in a dependent-care center—one that cares for more than 6 persons for a fee, the center must comply with all relevant state and local laws.
Expenses for in-home care of a qualifying child, disabled dependent, or disabled spouse. Qualified expenses for in-home care can include amounts paid for cooking and light housework related to the care of a qualifying individual, as well as actual care. Expenses for chauffeur or gardening services don’t qualify. Total qualified expenses also include gross wages paid for qualified services, plus the cost of meals and lodging furnished to the employee, plus your Social Security, Medicare, FUTA (federal unemployment), and any other payroll taxes paid on the wages.
The following expenses don’t qualify for the child and dependent care credit:
The cost of transportation to and from the child care facility
Overnight camp expenses
Any expenses allocable to the education of a child in the first grade or higher
The total cost of schooling below the first grade qualifies only if the cost of schooling can’t be separated from the cost of care.
Remember, payments to any of the following don’t qualify for the credit:
A person whom either you or your spouse can claim as a dependent
Your child who is under 19
An overnight camp
Some employers provide on-site child care for their employees’ children. Others pay directly for third-party child care, or allow employees to reduce their salaries and save the reduction in accounts specifically earmarked to pay for child-care expenses. In these cases, the value of the child care or the amount paid by your employer or taken from the account isn’t reported to you as taxable income.
Section 125 plans, also called cafeteria plans or flexible spending accounts, are salary-reduction arrangements offered by some employers. These plans allow employees to reduce their salaries by a certain amount in return for one or more nontaxable benefits. A common example is a flexible spending account used to pay child-care or medical expenses.
If your employer doesn’t include these amounts in taxable income, you must reduce the amount of expenses eligible for the credit by the amount excluded from income. The amount of child- or dependent-care benefits (DCB) is shown in box 10 of Form W-2. When your W-2 form shows dependent-care benefits, you must complete Part III of Form 2441 or Schedule 2, even if you’re not claiming a child care credit.
For more information, see IRS Publication 503, Child and Dependent Care Expenses.