Don't Miss Out on the Child Care Tax Benefits

Offset those baby expenses with these tax benefits

The costs of raising a child can really take a dent out of your income. The good news is, there are some major tax benefits available to you to offset some of the costs of dependent care. Make sure you are aware of every possible child and child care tax benefit allowed under federal law. Here is a rundown of the three biggest benefits available to you while you're raising kids.

The Child Care Tax Credit

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First on the child care tax benefit menu is the dependent and child care tax credit, which reduces the amount of federal income tax you owe. If you paid a qualified caregiver or daycare center to watch a young child so you could work or look for work, you likely can claim the child care tax credit.

The child care tax credit is a percentage—based on your income—of the amount of child care expenses related to work. The percentage can be as low as 20% and as high as 35%, based on the Internal Revenue Service table.  

The amount of child care expenses that can be applied toward the credit is capped at $3,000 for one child and $6,000 for more than one child in 2019. If you are a working parent, this credit can reduce your income tax significantly.

The Child Tax Credit

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Even if you don't have daycare expenses, you can qualify for significant tax help. The child tax credit can reduce your family's tax bill by $2,000 for each qualifying minor child. Up to $1,400 of that is refundable, meaning that if it reduces your tax bill below zero, you can get up to that amount back for each child.

Several factors will influence your eligibility for this credit, including your child's age, relationship to you, where they lived for the year, and their level of financial independence. If your child is not a minor but meets other criteria, you still might qualify for a $500 dependent credit. 

Under the 2017 Tax Cuts and Jobs Act, these credits replace the former dependent tax deductions.

The Earned Income Tax Credit

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This credit is designed to give additional benefits to working families on the lower end of the income spectrum. Limits for this credit are based on your income level and number of children, falling off at incomes above $46,844 for one child and $55,952 for three or more children in 2019.

Like the child tax credit, this is refundable, meaning you can get money back if it reduces your tax obligation below zero. Some states offer a version of the Earned Income Tax Credit as well.

A Side Note: Beware the Nanny Tax

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If you choose to hire an in-home nanny for your child-care needs, you need to be aware of the nanny tax. According to the IRS, your nanny is a household employee because you control what she works on (your children) and how she should take care of them (your daily instructions). 

The law says that if you hired someone to manage any household help, whether a nanny, babysitter, or housekeeper, you must pay Social Security, Medicare, FUTA (Federal Unemployment Tax Act) and federal and state income tax if their annual pay crosses over a certain threshold. In 2019, that cutoff is $2,100 for the year or $1,000 for any quarter of the year.

This may apply to your state taxes as well, so be sure you're aware of both the IRS rules and your state tax laws.

Even if you have to pay the nanny tax, the tax credits for dependent care are significant. Make sure you know what credits you and your family qualify for, so you can put more of your money toward your children's futures.