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How to Qualify for the Child Care Credit

It is fairly common for parents to pay for child care services while both of them hold down a job. Similarly, single parents may incur expenses for looking after their children while they are at work. Are there any tax advantages? Yes. You may be eligible for the dependent care credit, commonly called the “child care credit,” on your 2006 federal tax return.

The child care credit reduces your tax bill on a dollar-for-dollar basis. Thus, for every dollar of credit, you can subtract one dollar from the amount you owe Uncle Sam.

How do you qualify? The credit generally is available if you pay someone to care for a child under age 13 while you and your spouse are “gainfully employed.” For this purpose, the two of you are considered gainfully employed if one of you works full time and the other is either a part-time worker or a full-time student.

Actually, this credit is not necessarily limited to child care expenses. It may also be available for the cost of caring for a disabled dependent or spouse. For example, if your spouse is laid up for a few months with a bad back, the cost of having a helper around the house may be eligible for the credit.

How much is the credit? It depends. The credit is 35% of eligible expenses for those with an annual adjusted gross income (AGI) of $15,000 or less. It is reduced by 1% for each $2,000 that your AGI increases. Then it stops at 20% for an AGI of more than $43,000.

The credit is only available for the first $3,000 of qualified expenses for one child; $6,000 for two or more children. As a result, if your AGI exceeds $43,000, your maximum credit is either $600 or $1,200, respectively.

What expenses qualify for the credit? In general, they may be divided between in-home expenses and out-of-home expenses.

In-home expenses: The cost of a baby-sitter who comes to your house qualifies for the credit. The baby-sitter can even be a close relative such as a parent or one of your in-laws. However, the relative cannot be someone you can claim as a dependent. For example, if you pay your teenaged daughter to watch a younger child, the cost probably is not eligible for the credit. The credit may even cover expenses paid to a nanny who does other work around the house.

Out-of-home expenses: If you take your child to a baby-sitter's home, the cost also qualifies for the credit. Other eligible expenses include the cost of nursery school, a day care center or a similar-type operation. Note that the cost of summer day camp qualifies for the credit, but the cost of overnight camp does not.

Caution: There is another important limit to be aware of. Your eligible child care expenses cannot exceed the lesser of your earnings for the year or your spouse's earnings. If either you or your spouse is a full-time student, your qualified expenses cannot exceed the earnings of the full-time worker.

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	[ return to list ] How to Qualify for the Child Care Credit It is fairly common for parents to pay for child care services while both of them hold down a job. Similarly, single parents may incur expenses for looking after their children while they are at work. Are there any tax advantages? Yes. You may be eligible for the dependent care credit, commonly called the “child care credit,” on your 2006 federal tax return. The child care credit reduces your tax bill on a dollar-for-dollar basis. Thus, for every dollar of credit, you can subtract one dollar from the amount you owe Uncle Sam. How do you qualify? The credit generally is available if you pay someone to care for a child under age 13 while you and your spouse are “gainfully employed.” For this purpose, the two of you are considered gainfully employed if one of you works full time and the other is either a part-time worker or a full-time student. Actually, this credit is not necessarily limited to child care expenses. It may also be available for the cost of caring for a disabled dependent or spouse. For example, if your spouse is laid up for a few months with a bad back, the cost of having a helper around the house may be eligible for the credit. How much is the credit? It depends. The credit is 35% of eligible expenses for those with an annual adjusted gross income (AGI) of $15,000 or less. It is reduced by 1% for each $2,000 that your AGI increases. Then it stops at 20% for an AGI of more than $43,000. The credit is only available for the first $3,000 of qualified expenses for one child; $6,000 for two or more children. As a result, if your AGI exceeds $43,000, your maximum credit is either $600 or $1,200, respectively. What expenses qualify for the credit? In general, they may be divided between in-home expenses and out-of-home expenses. In-home expenses: The cost of a baby-sitter who comes to your house qualifies for the credit. The baby-sitter can even be a close relative such as a parent or one of your in-laws. However, the relative cannot be someone you can claim as a dependent. For example, if you pay your teenaged daughter to watch a younger child, the cost probably is not eligible for the credit. The credit may even cover expenses paid to a nanny who does other work around the house. Out-of-home expenses: If you take your child to a baby-sitter's home, the cost also qualifies for the credit. Other eligible expenses include the cost of nursery school, a day care center or a similar-type operation. Note that the cost of summer day camp qualifies for the credit, but the cost of overnight camp does not. Caution: There is another important limit to be aware of. Your eligible child care expenses cannot exceed the lesser of your earnings for the year or your spouse's earnings. If either you or your spouse is a full-time student, your qualified expenses cannot exceed the earnings of the full-time worker. [ return to list ]
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