Using Tax Credits to Help Pay for Child and Dependent Care

Did you know that you might be eligible for tax breaks to help pay for your child and dependent care expenses and reduce the taxes you pay or potentially increase your tax refund?

The four tax credits you should be familiar with include: Earned Income Tax Credit, Dependent Care Tax Credit, Child Tax Credit, and Dependent Care Assistance Plans.

Note: If you claim a tax credit on your tax return for child and dependent care expenses, your dependent care provider must complete a W-10 form. The form requires information on the dependent care provider such as name, address, and taxpayer identification number or social security number.

All types of child or dependent care programs including a center, family child care provider, church, neighbor or family member are required to provide you this information. If your dependent care provider does not comply with your request, you still must furnish their name and address.

W-10 forms are available at your local post office, library or from an accounting firm.

Earned Income Tax Credit (Schedule EIC)

 You may be eligible for the Earned Income Credit (Schedule EIC) of up to $2,547 if you have family earnings under $29,666* and have one or more qualifying children.

A qualifying child is a child who:

Even if you don’t owe taxes, you may be eligible for a refund check simply by claiming the credit.

Dependent Care Tax Credit

You may be eligible for Dependent Care Tax Credit (Form 2441) if you:

Families of all income levels are eligible. The higher your child care expenses and the lower the amount of your income, the larger your credit.

Child Tax Credit

You may be eligible for the Child Tax Credit (Form 8812) if you:

Dependent Care Assistance Program

Dependent Care Assistance Program (DCAP) was established to help you pay for dependent care expenses on a tax-free basis. The DCAP is only available through your employer and as a benefit. Tax savings with a DCAP can be significant. You do not pay federal, state, or local income taxes, nor do you pay Social Security (FICA) taxes on your deposits to your account or on the reimbursements paid to you. A DCAP is a good way to pay for expenses incurred for the care of your dependent child(ren), an incapacitated spouse, dependent parent, or a mentally or physically impaired dependent while you and/or your spouse work.

You may deposit into your DCAP as little as $100 to a maximum of $5,000 per year ($2,500 if filing a “married filing separate” income tax return). As you make this estimate, remember to exclude time for vacations, holidays and possible illness when you may not be required to pay dependent care expenses. Also consider, if appropriate, that you may participate in more than one type of dependent care program throughout the year—each with different costs. One example could be a before and after school program during the school year and full-time child care during vacation periods.

Your DCAP deposits are deducted from your paycheck each pay period. You will then be reimbursed in nontaxable dollars from your account for approved expenses. Unlike a bank account, your deposits and reimbursements are not subject to taxation.

If you use a DCAP, you may not claim the same expenses under the Child and Dependent Care Tax Credit. Most people re-ceive a greater tax savings with the DCAP. The tax credit applies only to federal taxes while the DCAP saves you federal, state and local income taxes, and Social Security (FICA) taxes. For more information about DCAP, inquire with your Human Resource Manager.

Family earnings and tax credits will vary from year to year. To learn more about these tax credits ask your accountant, the IRS at 1-800-829-1040, or log on to the American Business Collaborative website at: www.irs.gov