Thursday, July 20, 2017

New Parent Part III - Child and Care Tax Credits

After having a child, many moms and dads are left with the dilemma of whether to be a stay at home parent or go back to work and pay for child care.  Child care is expensive and it is now comparable or even more expensive than college tuition.  Therefore, it is important that you are aware of the tax breaks that are available for parents and which ones might benefit you the most. 

You may have heard of the Child Care Credit and the Child Tax Credit and thought they are the same thing. Perhaps you only recently learned about Flexible Spending Arrangements (FSA's) and while they affect your adjusted gross income, not all types can be used to pay for childcare. This week's post seeks to aid your understanding of these topics and clarify some of the more confusing points of them.

The Child Care Credit (formally known as The Child and Dependent Care Credit) and the Child Tax Credit are, in fact, two distinct credits available for you.  We will discuss the differences below.

Dependent Care Benefits and the Child Care Credit:

The purpose of the Child Care Credit is to provide a tax benefit for child care related expenses for a dependent(s) under the age of 13, so both parents can work and/or look for work. It is important to note that to be eligible for this credit, you and your spouse, if applicable, must both have had earned income during the year if filing jointly.

In addition, Dependent Care Benefits may be offered by your employer. This option can affect your Adjusted Gross Income (AGI) as the dependent care benefits are paid with pre-tax dollars to which you can contribute up to $5,000 ($2,500 each if married filing separately) per year. The contributed funds are not subject to federal, social security, Medicare, or state taxes on that income. This money may be placed into an FSA or used directly for dependent care expenses such as an employer run daycare or used for daycare elsewhere.

The Child Care Credit is based on actual child care expenses of up to $3,000 for each qualifying child, or up to $6,000 if you have more than one qualifying child.  The credit is then based on your AGI and is reduced as your income increases.

Expenses that can be claimed for this credit include, but are not limited to: at-home care (a nanny or babysitter), daycare, pre-school, before and after school care, summer day camp, transportation of your child by a care provider to and from the location where care is provided. Expenses for providing food, clothing, shelter, education, and entertainment do not otherwise count toward this credit.

If you have the option of utilizing both the employer provided benefits and the Child Care Credit, the amount that you decide to take pre-tax will be subtracted from the maximum amount you can take for the Child Care Credit. For example, if you have one child and take a $5,000 pre-tax contribution to an FSA, you exceed the $3,000 maximum amount and will not be eligible for any additional credit. On the other hand, if you have two qualifying children, qualifying you to receive the maximum $6,000 amount, and you make a $5,000 contribution to a dependent care FSA, $1,000 of additional qualified expenses would count toward your Child Care Credit.

Child Tax Credit:

The Child Tax Credit is an amount of up to $1,000 per a qualifying child that you can claim against your taxes. The child that you claim must be your dependent and be under the age of 17 on the last day of the yearThis credit can be claimed in addition to the Child Care Credit, pre-tax deductions discussed above, and the earned income credit, if applicable.

The amount of the credit is based on your modified adjusted gross income (MAGI). If your income exceeds the applicable limit, your child tax credit will be reduced by $50 for every $1,000 you are over until it is totally phased out. The limits for a MAGI is set by the IRS and for 2017 are as follows:
  • Married (filing jointly) - $110,000
  • Single, head of household, or window(er) - $75,000
  • Married (filing separately) - $55,000
If the amount you are to receive from the Child Tax Credit is more than the amount you owe in taxes, you may be able to take the Additional Child Tax Credit. This allows you to receive a refundable credit which can come in handy if your income was low for the year.

Every family situation is different and the laws can be confusing. Additional information can be found in IRS publications 503 Child and Dependent Care Credit and 972 Child Tax Credit, or check with your tax professional.

The next part in the series will discuss income tax credits related to adoption. In the meantime, if you have any questions regarding your personal taxes and how to report information relating to the Child Tax Credit or the Child Care Credit, please feel free to contact Glick and Trostin, LLC at 312-346-8258. 

To read the other posts in the New Parent Series, simply follow these links:

New Parent Series Part I - Dependent Issues and Tax Filing Status For You to Consider
New Parent Series Part II - Healthcare FSA's and HSA's
New Parent Series Part IV - Adoption Tax Credit and Benefits
New Parent Series Part V - Creating an Estate Pan

Disclaimer: The materials on this website are provided for informational purposes only and do not constitute legal advice.  Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between any attorney and any other person, group or entity. No representations or warranties whatsoever, express or implied are given as to the accuracy or applicability of the information contained herein.  No one should rely upon the information contained herein as constituting legal advice.  The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances.

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