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How You Can Save More Money in Taxes with Childcare

April 07, 2021

Regardless of the income bracket or whether it’s a single or two-parent household, for most people, working always takes priority over staying at home. When parents work, they need the reassurance that their children are being taken care of by a trusted daycare.

Knowing what’s available and how much it costs is the first step in creating a practical child care plan. Then figuring out how each option, or a combination of each, fits into the household budget is the next step. Equally important is being aware of the additional household resources available from employers and the federal government to ease the financial burden of the highest household expense, childcare.

It’s a known fact for working parents how costly reliable child care is. Fortunately, the child care credit and dependent care accounts are two federal tax breaks that will help defray some of these costs. If you pay for daycare or preschool, you should be aware of these two tax breaks that could save you thousands of dollars.

Child Care Credit

The child and dependent care tax credit (CDCTC) is a credit worth 20 to 35% of childcare expenses for a child under the age of 13 or any dependent who is physically or mentally incapable of self-care. The kid must be a U.S. citizen or permanent resident who spends more than half of the year with you.

The amount of eligible child care costs is limited to $3,000 per dependent. Credit rates are higher for households with a lower gross income. Families with incomes less than $15,000 are eligible for the entire 35 percent credit. This rate decreases by one percentage point for every additional $2,000 of income until it reaches 20% for families earning $43,000 or more. The Child Tax Credit is also refundable, which means it would adjust your tax bill to zero, and you may be able to receive a tax refund check for any excess.

Dependent Care Accounts

Dependent Care FSAsare set up through your employer. Participants enable their employers to deduct a predetermined amount from their paychecks each pay period and deposit it in an account. Rather than using FSA funds to pay for expenditures directly, you pay them out of pocket and then apply for reimbursement.

You set aside pre-tax dollars through your employer to pay your nanny, daycare, or preschool bills during the year. The money you put into the account is not subject to federal taxation. You cannot set up a dependent care account independently, and not all employers provide them. If you are a sole proprietor who works for yourself, you should open an account and regard yourself as an employee.

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