Child care is one of the four major expenses of working families, after housing, food, and taxes. It's important to understand the federal tax credits—both the Child and Dependent Care Credit and the Earned Income Credit—and to learn about any public or private financial help for which you might be eligible. A consultant at the program that sent you this booklet can give you more information about these credits. You can also call the Internal Revenue Service (IRS) directly at 1-800-829-1040. TTY/TDD users can call 1-800-829-4059. IRS Forms and Publications are available by calling 1-800-TAX-F0RM or via the Internet at www.irs.gov.)
The federal government gives you a credit for child care on your personal income tax. This credit is equal to 20-30% of your child care expenses, up to $2,400 for one child, or $4,800 for two or more children. To qualify, you must have earned income and the child care must be provided for a child under the age of thirteen so that you (and your spouse, if you are married) may work or look for work. Additional qualifications may apply, so be sure to review IRS requirements fully.
You may claim the credit on the short or the long income tax form. If you wish to have the withholding from your pay adjusted for this credit (to give you more money in your regular paycheck, rather than a lower tax bill or a tax refund at the end of the year), it can be listed on your withholding W-4 form. To claim the Child and Dependent Care Credit, you will need to file a separate "schedule" or form with your federal tax return (Form 2441 if you file a 1040 return, Schedule 2 if you use the shorter 1040A return). See IRS Publication 503, Child and Dependent Care Expenses, for instructions. You may also want to consult IRS Publication 926, Household Employer's Tax Guide, for tax implications of hiring an in-home provider. For more information on how to claim the Child and Dependent Care Credit, ask your accountant or the IRS.
If your family expects to earn under $29,201 (for 2002) and has one or more "qualifying" children, you may be eligible for an Earned Income Credit. These figures change, and there are other qualifying factors, so always check with the IRS. A "qualifying" child is a child who:
is your son, daughter, adopted child, grandchild, stepchild, or eligible foster child; and on the last day of the tax year is under age 19, or under 24 and a full-time student, or any age and permanently and totally disabled; and lived with you for more than six months during the tax year (the whole year if the child is your foster child).
Even if you pay no taxes, the IRS will send the Earned Income Credit as a refund check. To claim the credit, you will need to file a separate form, schedule EIC, with your tax return. For more detailed information, contact the IRS and obtain a copy of Publication 596, Earned Income Credit.
These two federal tax credits—the Child and Dependent Care Credit and the Earned Income Credit—are now the most widely available form of subsidy for child care. A few states offer tax credits, but they are not usually as substantial. Some companies also offer a Dependent Care Assistance Plan (DCAP). This plan allows you to set aside a certain amount of your income before taxes to pay for child care. See your personnel or benefits office for information on whether your company offers a DCAP and how to use it. Whether you use a DCAP by itself or in combination with the Child and Dependent Care Tax Credit, you cannot set aside from your income more than $5,000 of your employer's dependent care benefits. If you set aside dependent care benefits from your income, the amount set aside will reduce the dollar amount eligible for the Child and Dependent Care Credit. The Earned Income Credit is available even if you do not pay for child care expenses.
Your state receives funds from the federal government to be spent on child care for low-income families. Generally, single-parent families are more likely to meet the income eligibility requirements.
Private scholarship funds may be available for your child from the United Way or other civic organizations. A few cities help parents to pay for child care. A few companies help their employees pay for child care. The greatest help is usually directed at lower-income families. Your child care consultant can tell you about state and local child care subsidies for which you may be eligible. Your personnel or benefits office can tell you whether child care subsidies are available through your employer.
You might be able to deduct from your income the cost of some benefits you give your in-home provider. An example might be room and board for a live-in provider. When you claim these deductions, your provider must report the same amount as income, and you are responsible for paying the employer's portion of any taxes due on that income. Discuss this possibility with your accountant or the IRS.
In order to claim the Child and Dependent Care Tax Credit, or to participate in a DCAP at work, parents are now required to report the names, addresses, and social security or local tax ID numbers of the providers.
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