As a parent, you know how quickly expenses can add up. And as a working parent, you know that child care is one of the biggest expenses you will ever have to face.
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As summer quickly approaches, many parents who can normally count on school being a care provider by proxy are wondering what to do with their children while they are working. Day camps are a popular option and luckily, their costs can be partially claimed through a child care tax credit that all employed parents should know about.
Along with regular daycare centers, nannies and qualified in-house caregivers, tuition for summer day camps can be partially covered under the Child and Dependent Care Tax Credit (CDCTC). Unfortunately, overnight camps are excluded from credit eligibility.
Originally created in the 1970s to help working parents offset the cost of daycare, after-school programs and summer camps, the Child and Dependent Care Tax Credit may not be as well known as the Child Tax Credit, but it may yield more in tax credits.
The Child and Dependent Care Tax Credit provides help to parents in covering the cost of care for children under the age of 13 or adult dependents. Like the CTC, the CDCTC was expanded as part of the American Rescue Plan Act (ARP) in March 2021 and was only available in an enhanced version for the 2021 tax year. It has since reverted to the pre-pandemic maximum amounts per eligible child.
According to a ValuePenguin.com study in February 2022, the average cost for an infant in full-time child care is $9,991 per year in the U.S. As children reach school age, the cost of care for a family normally goes down, but costs can still pile up throughout the year depending on what kind of care you require and where you live.
For in-home care and nannies, au-pairs and babysitters, the costs can run in the tens of thousands. Likewise, when the school year ends, children and dependents requiring care often attend specialized summer day camps, which are usually pricier than regular care during the school year.
As mentioned above, the CDCTC has reverted to ARP-assisted, pre-pandemic credit conditions but the general eligibility rules haven’t changed. It should be noted that CDCTC is an earned income credit, meaning that you (and your spouse, for joint tax returns) must have earned income during the year, were looking for work or were full-time students to claim the credit. Also, income level isn’t a factor but you will get less if you make more. This credit is designed with working families in mind.
To qualify for the child care tax deduction:
- The care you are providing must be for a child under 13 years (or a spouse or dependent who isn’t mentally or physically able to care for themselves and lives with you for more than half the year).
- You (if single) or both you and your spouse work, are looking for work or are full-time students.
- You must have qualifying children or dependent care-related expenses.
To claim the child care tax credit, you will need to file IRS Form 2441 with your personal federal income tax return. This form asks for care-related expenses for the calendar year and then calculates your savings based on a percentage determined by your adjusted gross income. The credit can be as much as 50%, but most families will see a 20% savings.
You are limited on how much in child care expenses you can claim, based on how many kids you have. The expense limit starting point is $3,000 for one child or $6,000 for two or more children or dependents. That means most families can expect to save up to $600 if they have one child and up to $1,200 if they have two or more children.
Parents can lament the discontinuation of enhanced child tax credit programs all they want, but until new legislation is passed, they need to exhaust all opportunities to save money and claim available tax credits where possible. Because, as a parent, you know that every dollar counts.