If you are eligible for both the child care credit and a dependent care account, you can opt to use one or both.
Choosing one. Usually, which child care tax break is best for you depends on your tax bracket. A good rule of thumb is to opt for an employment-sponsored dependent care account if you are in the 28% tax bracket or higher. If you're unsure which will save you more money, ask a tax professional to run the numbers for you.
Using both. You can use both the child care credit and a dependent care account, but the money you contribute to your dependent care account will be subtracted from the maximum amount of child care expenses you can claim under the child care credit.
Here's an example. Let's say you earn more than $100,000 one year and you have one child. You contribute $2,000 to an employer-sponsored dependent care account. Without a dependent care account, you could claim a child care credit of 20% of $3,000 (amounting to $600). Instead, the dependent care contribution is subtracted from the child care credit ($3,000 - $2,000 = $1,000) allowing you to claim a child care credit of 20% of $1,000 (amounting to $200).
Who is Eligible for Child Care Tax Breaks?
You must meet the following requirements to be eligible for either the child care credit or a dependent care account:
- your child must be your biological, adopted, step, or foster child
- your child must live with you for more than half the year (time away from home for school or traveling counts)
- your child must be younger than 13 or permanently and totally disabled
- you must pay more than half the cost of keeping up a home in which you and your child live during the year (if your child has a trust fund or other income, the trust cannot provide more than half the support)
- you (and your spouse, if you are married) must work, look for work, or be a full-time student (single parents qualify if they are working or attending school full time, even if the child's other parent is not), and
- you (and your spouse, if you are married) must have earned income for the year.
In addition to the above, your child care expenses must meet all of the following criteria:
- your child care provider must be someone whom you can't claim as a dependent -- this may include a licensed day care provider, preschool, or on-the-books nanny but can't include anyone you pay under the table
- you must have used the child care to enable you to work, look for work, or attend school full time (for example, you cannot claim a credit for babysitter costs incurred to run errands or go out on Saturday night), and
- the payments must have been for child care only, not for items such as food, lodging, clothing, education, and entertainment. (Expenses for household services, such as housekeeping, qualify if they are at least partly for the well-being and protection of your child.)
Note that you don't have to engage in comparison shopping and select the least costly child care option out there. Your expenses qualify even if there are less expensive or no-cost alternatives available to you.
To learn more about tax deductions available to families and get answers to other legal questions facing parents, read The Legal Answer Book for Families, by Emily Doskow (Nolo).
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