Q: Tax Playa, why do working parents get a tax subsidy, and I get nothing for my stay-at-home wife's contribution to my household?
Brian, Washington DC
A: You're right--it isn't fair. A tax subsidy is given just for day care, but a corresponding tax credit for homemakers is not available. Nonetheless, it's my job to give the best tax advice I can--so here we go.
For more on this topic, please consult IRS Publication 503, "Child and Dependent Care Expenses."
A credit can be claimed for day care expenses incurred during the year. In order for the credit to be claimed, three tests must be met:
- Qualifying Person Test. The person for whom the expenses were made must be a child-dependent under age 13, or a spouse or child who is not able to care for themselves.
- Earned Income Test. You and/or your spouse must have earned income (wages and self-employment income, mostly) in the year. The credit is to subsidize work.
- Work-Related Expenses Test. The expenses claimed must be for the purpose of you and your spouse working or looking for work (full-time college counts), and they are for a qualifying person's care.
The credit is not generally-available for married filing separately taxpayers, though if one party is very nearly like a head of household it may be available.
Payments to household employees count, though a Schedule H must usually be filed in these cases.
Payments to relatives are allowed unless it is to your minor child, your dependent, your spouse, or the parent of the qualifying child.
You must provide the identifying number (EIN or SSN) of the provider of services to your qualifying child. This is generally the day care center's tax ID number.
There is a separate $5000 dependent care fringe benefit allowed under some company plans. If you take advantage of this employer benefit, your tax credit is reduced to the extent you use it. Generally, if your employer offers this benefit it is more lucrative than the tax credit (the only exception being for fairly low-income people).
The dollar limit for taking the credit is $3000 for one child, and $6000 for two or more children. This amount is the basis for the credit calculation. The credit is determined by multiplying the expenses claimed by a multiplier. This multiplier can be as high as 35%, but for most people it is 20%. For any households with AGI of $43,000 or more, the 20% figure applies.
The long and short of it is that most families with day care expenses can claim a credit of $600 for one child or $1200 for two or more children. The credit is not refundable, meaning it can only zero out your tax liability.