Child Care Credit: Subsidizing Working Mothers Instead of Homemakers

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:

1. 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.
2. 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.
3. 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.

Comments

[GetSheila]

Let me get this straight: Brian's wife provides free child care as well as free housekeeping, cooking, shopping and I'm sure many other tasks throughout the day in support of their household. Brian gets all of this for FREE, yet he begrudges a tax credit to people who have to pay for child care?

Please tell me you made that question up.

[PG]

To be fair, he isn't getting this work for "free" - there is, at the very least, an Opportunity cost associated because his wife COULD be earning an income.

[Mani Karra]

Hi
My Brother-in-law and his wife both are working. She works from home and claims the deduction for a home office.

I being a homemaker, we cannot claim our 5 yr old daughter's school/day care expenses on our return.

Last year my inlaws were here in the US for 6 mth visit and they spent 3 mths with my Brother-in-law and 3 mths with us.

My question is: Who is at benefit claiming their expenses as dependants?

[Ryan Ellis]

For dependent exemptions, there are a specific set of rules. The link is to the right, or paste the following URL into your browser:

http://taxplaya.typepad.com/tax_playa/2006/09/dependency_rule.html

[amiee]

I am a single mother of 2 children 7 & 8. Their father has not paid child support in 3 years, needless to say I work about 50-60 hours a week; thus I spend an average of 12,000.00 a year in child care. Since I work, and have no one else to help I pay a sitter to run them to school and activities. How can I claim this on my taxes. I could use a resource to even out the mass I pay out so I do not go on welfare.

[Elisabeth Geers]

Quick question and maybe it is already answered but the fringe benefit is that reportable if a company pays it to an employee in a separate check? For instance - $405 per month to off set the after tax child care expenses for daycare? Much like when I worked for a company and didn't take their health benefits - they paid me $100 a month to thank me for not taking the benefits and this amount $1200 - never showed up on a W-2 or 1099. Thank you for your MOST informative site and I appreciate any feedback you can offer. Currently I am working PT to not have my child in FT daycare - and my boss wants me back FT so they offered to help out - they may end up decreasing my salary by the amount they give me for "fringe" payments but that would be fine since that is extra money and I am using it to help with the burden of daycare expenses that come from my AFTER tax money. Am I making sense here?
THANK YOU!