The tax code can be generous when it comes to families with young children, offering a significant credit related to the costs of raising and caring for those children. Specifically, the “child-care credit” is a benefit for gainfully employed, single or married parents who have at least one child under the age of 13. Within the basics of that benefit, however, are several nuances that you can take advantage of when it comes time to file your return.
The credit may be equal to 30% of qualified expenses up to the first $3,000 spent on one child, and twice that amount if there are two or more children. “Qualified expenses” are limited to less than the amount of one’s earned income, or in the case of a married couple, the amount earned by the spouse whose income is lower. This percentage is also affected by your AGI (adjusted gross income); as your AGI rises to the level of $43,000 or above, the credit reduces to 20%. Therefore, most moderate-to-high-income individuals can pocket a maximum or $600 (20% x $3,000) or $1,200 for two or more children.
Taxpayers who are able to take advantage of the credit should be aware that qualified expenses encompass more than services exclusively related to children, such as daycare. If you have domestic staff, their salary may qualify for the credit if at least a portion of their work goes towards caring for your children. Note that the IRS does get particular in terms of “type” of domestic work—while housekeepers and cooks are qualified expenses under the credit, drivers or landscapers are not. Also, you may be required to differentiate between the amount of work related to child-care and that which is not, and then determine how much is actually qualified for the credit.
One final detail to be aware of: Although it’s most commonly referred to as the “child-care” credit, in truth it is a credit for any dependent. For example, if another family member, including your spouse, requires at-home medical care, then that nurse’s salary could be considered a qualified expense as well.