When I talk to my working friends, most of them have the same frustration with one expense each month — daycare costs. I work from home with my daughter so I haven't had to navigate this issue too much, but from what I hear daycare is expensive. Many people employ the low-cost daycare options or use government assistance, but with tax season here, lots of parents are wondering if daycare is tax exempt.
According to Child Care Aware of America, in 2014, the cost of putting two children in daycare was more than the housing costs of homeowners with mortgages in 24 states. Per the same report, in 28 states, the annual cost of keeping an infant in daycare was higher than a year's tuition plus fees for a public university. It's no wonder that so many parents try to find family members to watch their children or become stay-at-home-parents, but for many, daycare is an absolute necessity.
But can it benefit you when it's time to do your taxes? Is daycare considered tax exempt?
Not exactly, but there is a federal tax credit that can help you out with your child care expenses. According to Turbo Tax, the child and dependent care credit "refunds" a portion of the money you've spent on child care the previous year. Instead of a tax deduction, it's a tax credit, meaning that it actually reduces your taxes dollar for dollar. For example, if you're eligible for a $1,000 child and dependent care credit, your taxes due will be cut by $1,000. The IRS notes that depending on your adjusted gross income (AGI), the credit can be up to 35 percent of your qualifying expenses.
Regardless of your income, however, you can still claim this credit. A higher income may not get as large of a credit as someone with a lower income, but the credit still applies and can deduct your taxes in some form, notes Turbo Tax.
The maximum amount of child care expenses you're allowed to claim for one child is $3,000, and $6,000 for two children. The credit is a percentage of these allowable expenses from 20 to 35 percent depending on your AGI.
You can also use a dependent-care flexible spending account if your employer offers it. This FSA allows you to use pre-tax dollars to pay for childcare expenses up to $5,000 according to Time. You can also claim the credit if you use an FSA, the credit will just apply to the expenses not covered by your account.
No matter how much your child care expenses are or your income, you're eligible for the child and dependent care credit if you meet these five requirements.