Do You Qualify for the Child or Child Care Tax Credit?

childcare

Raising a child is a fulfilling but increasingly expensive endeavor. The average cost of raising a child to age 17 easily tops $200,000. Fortunately, there are a number of tax credits that parents and guardians can tap into to help defray the costs.

In this article:

Childcare tax benefits: An overview
Federal child tax credit
Child and dependent care credit
Earned income tax credit
Medical expenses deduction
Other tax credits
Government programs for low-income families

Childcare tax benefits: An overview

There are a number of federal and state programs dedicated to helping minimize the monetary cost of childcare that available to both middle and lower income families. The most significant aid that the federal government offers is at the tax level. Tax laws can become confounding, especially given the fact that there are a number of credits that parents and guardians can simultaneously apply for. With a little bit of patience and extra paperwork, you can funnel a few thousand dollars of your yearly income away from the tax man and towards your day care costs.

The trifecta of federal tax credits that most tax experts recommend applying for is the Federal child tax credit, the Child and Dependent Care Credit, and the Earned Income Tax Credit. Beyond that, there are myriad other perks that families of minors and students can take advantage of to help alleviate the cost of child-rearing.

Federal child tax credit

The federal child tax credit offers up to $1,000 per child under 17 at the end of the year. You can only take advantage of the full credit if your income is under $110,000 for married filing jointly, $55,000 for married filing separately or $75,000 single head of household. However, if your income goes above that threshold, your credits are phased out by $50 of each $1,000 you earn above the limit. This means that anyone with income below $130,000, $75,000 and $95,000 respectively can claim at least some of the credit.

Before downloading the number of forms required for filling for the federal child tax credit, take a look at the following test for eligibility to determine whether or not your family qualifies for the credit.

  • What is your relationship to your child? The child tax credit applies to dependents including your biological child, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, or any of their children (i.e. grandchild, nephew, etc).
  • What is your child’s age? The child tax credit can only be claimed for those dependents under the age of 17 at the end of the year. Parents of teenagers often overlook this benefit as their kids outgrow the need for a babysitter. Legally, you can continue to file for the credit until your children reach the maximum age cutoff of 17.
  • How much support did you provide your child during the last tax year? The child must be filed as dependent on your tax returns and cannot file his or her own tax return. Furthermore, you must have provided at least half of your child’s support during the last year.
  • Has your child lived with you for at least half the year?
  • Is your child a US citizen, US national, or US resident alien?

The credit is also refundable, up to 15% of earnings over $3,000. Moreover, California, Oaklahoma, New York and North Carolina offer state child tax credits in addition to the federal one.

The form: 1040, Schedule 8812

Child and Dependent Care Credit (the Child Tax Credit)

The child and dependent care credit offers relief if you had to pay for childcare while working or looking for work. The requirements for this credit are bit more complex and restrictive than the straight-up child tax credit. First, you must determine whether the person being cared for is a “qualified individual:”

A dependent child under age 13 when the care is provided,

A spouse who is incapable of caring for him or herself, and who lived with you for at least half the year, or

A dependent who is incapable of caring for him or herself, and who lived with you for at least half the year, regardless of:

  • The dependent’s gross income
  • Whether the dependent files a joint tax return
  • Whether you are another taxpayer’s dependent

If your child qualifies as a dependent, you must now ask yourself:

  • Were the expenses incurred required for you to remain gainfully employed?
  • Is the qualifying child 12 years old or younger? Is the dependent or spouse you
  • How much support did you provide your child or dependent during the last tax year?
  • The child and/or dependent you are filing for must be claimed as dependent on your tax return and they cannot have provided more than half of total care costs alone.
  • Have you met the requirement of filling jointly if you are married?
  • Is the caretaker you paid for your spouse, a parent of the child, another child of yours under age 19, or a dependent of your spouse? If so, you cannot apply for the credit.

As long as you meet the requirements above, you are qualified to apply for the child and dependent care credit. When filing for this credit, keep in mind that qualifying expenses go beyond physical care but extend to household expenses like cooking and cleaning. The maximum creditable expense is $3,000 for a single dependent household. Currently, 24 states offer a version of the dependent care credit; 8 of those are refundable.

The form: Form 2441

Earned Income Tax Credit (EITC)

Passed in 1975, the EITC is designed to help low-income, working families. Enacted in 1975, the EITC is one of the few tax credits that can become refundable if the filed credit exceeds the tax liability. This means that if you’re due to receive a credit of $5,000 but you only owe $2,000 in taxes, you can get a check for $3,000 instead of having that money vanish.

The EITC is based on a fixed percentage of earnings until a phase out limit that varies depending on the composition of your family. After the phase out threshold, the credit decreases until it reaches zero. The maximum possible benefit is $6,000 for a family with two children and $3,000 for a family with a single child.

Check out the IRS’s website to see if you qualify for the EITC.

Medical expenses deduction

If your child has special physical, mental or dietary needs, you might be able to deduct them as medical expenses. Generally speaking, you can deduct your and your dependents’ medical expenses in excess of 7.5% of your adjusted gross income. This means that if your AGI was $100,000 and you spent $8,000 on your and your child’s medical expenses, you can deduct $500.

The term “medical expenses” encompasses more than you’d think:

  • The extra cost of gluten-free foods over comparable regular foods, if your child has a gluten allergy
  • Transit to and from doctors’ offices
  • Private schools and programs, if your child needs them to accommodate a disability
  • Therapeutic materials, such as adaptive headphones
  • Special instruction, such as speech therapy or remedial reading lessons
  • Attending a disability conference to obtain medical information
  • Exercise such as yoga or horseback riding, if recommended to treat a specific condition
  • Home improvements related to a disability (costs over the increase in the home’s fair market value are deductible)

Other tax credits

Credit Meant for Income threshold Limit Refundable?
American Opportunity Tax Credit College kids: Deduct course materials, tuition and fees Phase-out over $80,000/$160,000 $2,500 40% refundable
Coverdell Education Savings Accounts (Education IRAs) Education: You can contribute up to $2,000 a year until the child is 18, and the gains will be tax-free if used for educational expenses None $2,000 annual contribution limit If funds aren’t used for education, gains will be taxed and subject to a 10% penalty
Adoption tax credit – regular adoption Adoption expenses: For children under 18 or disabled, covering expenses such as adoption fees, court costs and traveling costs None $12,650 per child No
Adoption tax credit – special needs Adoption: In the year of finality, you can claim the full credit if the child has special needs (including most foster children) None $12,650 per child No
Flexible Spending Account (offered by employers) Employed parents: Money disbursed from an FSA can cover care for dependents while the parent is at work None $5,000 annual contribution limit FSA funds are pre-tax, but expire if unused

Government programs for low-income families

Besides tax breaks, there are a bevy of extraneous aid programs that provide direct or monetary support for health care, child care, and housing for children. Find out what programs there are and whether or not you qualify by using this benefit finder.

Children’s Health Insurance Program (CHIP)

Even if your income is too high for Medicaid, your children can still get insured up until the age of 19 with CHIP as long as your family doesn’t make more than $45,000 a year for a family of four. Since CHIP is state-funded, each program has a different name, like Healthy Families in California or Hoosier Healthwise in Indiana. Though the federal income cap is $45,000 for a family of four, many states allow incomes higher than that.

CHIP provides free preventative services, though there might be copays for other services, and many states charge a monthly premium. However, the total costs cannot exceed 5% of your monthly income.

Temporary Assistance for Needy Families (TANF)

TANF, which replaced the Aid to Families with Dependent Children in 1997, provides cash assistance to needy families out of work. the  block grant that provides cash assistance to families out of work. You can only receive benefits for a maximum time of 60 months, though some states impose a shorter time limit. While families are receiving TANF benefits, the adults are required to find a job within 24 months. States are allowed to implement their own rules and requirements in addition to the ones outlined above.

Supplemental Security Income (SSI)

If your child is disabled and under 18 (or is under 22 and a student), and you meet income qualifications, you might qualify for supplemental security income (SSI). The income cutoff for a family of three ineligible children is $52,668 for a single-parent household and $61,212 for a two-parent household. The Social Security benefit screening tool can help you determine your eligibility.

Head Start and Early Head Start

Head Start is a federal program that fosters intellectual, physical, and social development in low-income children up to five years old. You may be eligible if your family’s income is below the poverty line; if you have special circumstances; or if your child is in foster care, receiving TANF or on SSI. Head Start itself serves preschool-age kids and families; Early Head Start works with infants, toddlers, and pregnant women. Depending on the community’s needs, Head Start may take the form of day care or preschool, family child care homes, or visits to the child’s own home. The Head Start locator lets you find a program near you.

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