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:

• the credit for child or dependent care
• the exclusion for employer-provided care
• the earned income credit (EIC)

There is also a $1,000-per-child credit through 2014. 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.

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.

The following sections discuss the ins and outs of the credit for child and dependent care:

• how the tax credit works
• eligibility for the credit
• work-related expenses
• claiming the credit