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. Under the regular rules, 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).
You must meet the following requirements to be eligible for either the child care credit or a dependent care account:
In addition to the above, your child care expenses must meet all of the following criteria:
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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