Child care tax credit

Factual Questions
1

So Left Hand of Dorkness and I are expecting our first young’un this January (working title: Melchior the Impaler). Meantime, we’re taking a good long look at our finances and exploring different options re: daycare, etc. I’m a bit confused about the federal child care tax credit. Some sites I’ve seen say that you can get a credit of up to $3,000 for one child. Others say that you can recoup a percentage of that $3,000. If your household income is more than $43,000, you can claim 20% of the $3,000 you spent on child care as a tax credit–in other words, $600.

Which is right? Is there something I’m missing? Any clarification would be greatly appreciated. Thanks.

2

I think the credit of $3000 is correct but it’s not a refund of $3K but rather a reduction of $3K on your taxable income at year end.
So at year end if you’re calculating your taxes based on annual earnings of $75,000 having a kid will allow you to be taxed on earnings of $72K instead.
How that all plays out with your final refund depends on your tax bracket.

3

There are a couple of things at play.

There is a childcare tax credit, based on the amount you spend on daycare; it’s a percentage of what you spend that varies inversely per your income. For example, we can take a credit of 20% of what we spend in childcare, up to a cap of 3,000 per kid or 6,000 total for the family (and it is 6,000, or at least was last year per the tax return copy I happened to have near to hand). If our income were lower, we’d take a higher percentage of that 6,000. That also goes away when the child turns 13. http://www.irs.gov/newsroom/article/0,,id=106189,00.html (I think you can claim it for an older child or other family member if the family member is disabled).

Then there’s the separate child tax credit, which you get even if you don’t have daycare expenses. That also phases out as income increases; I don’t know at what level it goes away completely but some years we haven’t gotten anything, last year we got 750.00. Info here.

Your job may also offer a pre-tax account where you can set aside up to 5,000 dollars for dependent care expenses, pre-tax. Generally you’re better off using the pre-tax account rather than using the 6,000 for calculating the tax credit. For example if your tax bracket is 25% and you pay 5% in state taxes, you’d save 30% of the 5,000 dollars (or 1500 dollars), plus I believe there is no social security taken out so there’s another 6.85% savings. Whereas that same 5,000, if you got the 20% credit, would save you 1,000 on your taxes. You should look at the numbers using your own income and see which benefits you more (if you’re lower income, you might get a better deal avoiding the pre-tax account and just taking the federal tax credit).

The childcare tax credit used to have a ceiling of 2500 per kid, so for my 2 kids, it matched the flex spending figure. Now that they’ve raised that to 3,000 per kid, the total is 6,000 - so I get to calculate the childcare tax credit on the difference between the flex spending ceiling of 5000 and the limit of 6,000. That saved me 200 dollars a year (20% of 1,000) the last couple of years. Dweezil however is now over age 13, so we won’t get to do that any more.

4

I don’t know the details of this particular credit but it is indeed a credit. The word *credit * means the amount is subtracted directly from your taxes, not a deduction from your income.

5

My experience matches Mama Zappa’s. Here’s a link to the IRS form:

It is a credit, in the sense of it’s taken right off the total taxes and not as a deduction, but the amount credited is a percentage of the amount you spend on daycare (up to $3k/$6k). The percentage goes from 35% if your income is less than $15k, down to 20% if your income is over $43k.

And if you do an employer daycare account, that comes out of your total $3k/$6k.

Any chance you can have the kid in December instead of January? Kids are a big tax break, and you don’t have to prorate them for the year.

6

Thanks, y’all. That helps clear things up.

When we told my father-in-law we were expecting, one of the first things he said was, “January? But you won’t get a 2008 deduction!”