Use the child care tax credit to save on your 2020 taxes
Families can save up to $1,200 each year with this tax deduction for child care expenses
Once families find a qualified, trustworthy nanny, the next step is making sure their finances are in order. As long as the nanny is paid on the books, the vast majority of families will be eligible to take the Child or Dependent Care Tax Credit for their 2020 tax returns. However, according to the IRS, only about 6.5 million families do each year. In this article, we'll go in-depth about this tax break to cover:
- The qualifications for taking the child care tax credit
- The expenses you can apply to the tax credit
- How to claim the credit on your taxes and what you can save
- A budget scenario using the child care tax credit
Families have no income restrictions when it comes to claiming a child care tax deduction. A long as your family meets the following requirements, you are able to take advantage of the tax credit:
- The care must be for a child under the age of 13;
- Your family must need child care because both you and your spouse work, are looking for work or are full-time students;
- You must have qualifying child or dependent care-related expenses.
According to the IRS, you can apply any child care expense that is for the well-being and protection of your child. A few examples of qualifying expenses are:
- Your nanny's wages.
- Fees paid to a placement agency to match your nanny with your family.
- The household employer taxes paid on top of the nanny's wages.
- Dues for enrolling your child in a day care facility.
- Tuition for a day camp (overnight camps are excluded).
You will need to file IRS Form 2441 with your personal federal income tax return in order to claim the child care tax credit. The form asks for your care-related expenses for the calendar year and then calculates your savings based on a percentage determined by the your income level. While the credit can be as much as 35%, most families will receive a 20% tax savings.
You are limited on how much in child care expenses you can claim, based on how many kids you have. The expense limit is $3,000 for one child or $6,000 for two or more children. Because most families will receive a 20% tax credit on their child care expenses, you can expect to receive a tax break of up to $600 if you have one child and $1,200 if you have two or more children.
A family hires a nanny to watch their two daughters ages 5 and 3 during the weekdays while they're at work. They pay their caregiver $29,000 for the year, withhold the appropriate taxes from them and pay the required employer taxes. The family's cost as a household employer breaks down like this:
|Gross Wages for the Nanny||$29,000|
|Social Security Taxes||$1,798|
|Unemployment Insurance Taxes||$258|
|Total Employer Taxes||$2,476.50|
|Total Cost (before tax breaks):||$31,476.50|
Since both parents work full-time and their children are under 13 years of age, they qualify for the child care tax credit. Their income level translates to a 20% tax credit which they can take on $6,000 of their child care expenses. This means the family will receive a tax break of $1,200, bringing their employer costs down to $1,276.50. That's nearly half of what they would have paid without the tax credit!
What the example above should illustrate is that if you have qualifying child care expenses, you should always take advantage of the child care tax credit. Use Care.com HomePay's budgeting calculator to see how much you can save and visit our tax breaks page for information on other deductions you can take.
- Learn more about household employment payroll and taxes
- See how a Dependent Care Account can also help save money
- Understand how taxes work for your care budget
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