The Credit for Child and Dependent
Care
Congress and the IRS both recognize
that in many situations you have to spend money to make money. This
is especially true of working parents, many of whom would find it
impossible to look for a job, let alone actually work at it, without
paying someone to look after their children. Those who are responsible
for looking after an aged parent or a disabled relative often find
themselves in the same position.
To lighten some of the extra
burden that falls upon working parents and those caring for disabled
dependents, Congress has provided three basic types of tax benefits
for employees or the self-employed:
There is also a $1,000-per-child
credit for children under age 17. This credit is available to
all parents and does not depend on whether or not one or both parents
work outside the home.
You must choose your benefit.
To some extent, the child and dependent care credit, and the exclusion
for employer-provided dependent care assistance, are mutually exclusive.
If you use one, you might be totally or partially precluded from
using the other.
Thus, if your employer offers any assistance
for dependent care, you'll have to decide which strategy saves you
more money: taking advantage of your employer's assistance program
or claiming the tax credit. In certain limited circumstances, you
might be able to combine methods.
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Save Money The decision as to which tax break
is best for you depends on factors including the kind of assistance
your employer offers, your marginal tax bracket,
whether you have one qualified dependent or more, and the amount of
qualified expenses you had this year. As a rule of thumb,
if you have an adjusted gross income of more than approximately $25,000,
you'll save more money by taking full advantage of any assistance
offered by your employer, even if that means giving up the tax credit. In
other situations, the answer is not so simple and you may have to
figure out your tax bill both ways before you can tell which strategy
is best for you. |
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The following sections discuss the ins and outs of the
credit for child and dependent care:
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