How much does that kid cost?!
This chapter is a free excerpt from Ask the TaxGirl: Everything Parents Should Know About Filing Taxes (Including Child Care Expenses, Medical Costs, and the Earned Income Tax Credit.
The credit for child and dependent care expenses is available for a parent or parents who work or who are looking for work. The amount of the credit is based a percentage of your work-related expenses and can be up to 35% of your expenses. Qualifying expenses used to calculate the credit are capped for 2012 at $3,000 for one child and $6,000 for two or more children per year.
To claim the credit, you must file a federal form 1040 or federal form 1040A using any filing status other than Married Filing Separately: you cannot claim the credit with a federal form 1040EZ or if you file MFS. You must also file a federal form 2441 (downloads as a pdf).
To qualify for the credit, you must have expenses for care for one or more qualifying child who is your dependent (as defined earlier in the book) and who was under age 13 when the care was provided. You can also claim expenses for care of a spouse or dependent who was not physically or mentally able to care for himself or herself and lived with you for more than half the year. You can also claim the credit for a person who was not physically or mentally able to care for himself or herself and lived with you for more than half the year and would have been your dependent except that he or she received gross income of $3,650 or more, filed a joint return, or if you, or your spouse if filing jointly, could be claimed as a dependent on someone else's return.
You (and your spouse if filing jointly) must have earned income during the year to claim the credit. If you or your spouse does not earn income during the year, you may not claim the credit even if you paid child and dependent care expenses. You get a break on this requirement if you or your spouse is a full-time student or is physically or mentally not able to care for himself or herself.
Finally, you must make payments for child and dependent care to someone that you (and your spouse) cannot claim as a dependent: if you're paying your child to care for another child, he or she cannot be your dependent and must be age 19 or older by the end of the year. Additionally, you can't claim the credit for payments to your spouse or the parent of your qualifying person if your qualifying person is your child and under age 13. There’s no way to fudge this: you must identify the provider on your tax return by name and Social Security Number (or EIN, if it's a business).
The child and dependent care credit is a little tricky when it comes to divorce so read the rules carefully. The first thing to note is that, even if you cannot claim your child as a dependent (as defined earlier in the book), he or she is treated as your qualifying person if the child:
- was under age 13 or was not physically or mentally able to care for himself or herself;
- received over half of his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the calendar year; and
- was in the custody of one or both parents for more than half the year.
For most of this discussion, I’m going to refer to a babysitter in terms of a regular babysitter and not the girl down the street who occasionally watches your kids while you go out on a date (you remember what those are, right?). An occasional babysitting gig doesn’t require you to jump through any hoops (well, not on the tax side anyway) and, of course, doesn’t result in a child care credit.
But what about a regular babysitter? That raises all kinds of interesting issues.
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