As Ben Franklin once said, "In this world nothing can be said to be certain, except death and taxes." It's that time of year again, when we try to wade through our finances from the previous year to file our state and federal taxes. As parents, you may be wondering, in which states is childcare tax deductible in 2018? Does every state qualify?
The short answer is no, but there are currently 23 states where you can get a childcare tax credit. The whole thing is extremely complicated, which is why God invented accountants, I think. The first thing to understand is the difference between a tax deduction and a tax credit. The Internal Revenue Service (IRS) is the government organization tasked with collecting all of our federal taxes. They describe a tax deduction as an amount you deduct from your income before you calculate your taxes owed. A tax credit, on the other hand, is an amount you deduct from the taxes you would need to pay.
Let's break it down. Let's say you made $100,000 in 2017 and you are supposed to pay 25 percent of your income in taxes. If you took a $2,000 tax deduction, you would be paying taxes on $98,000 which comes out to $24,500. If you took a tax credit in this case, you would earn $100,000 and have a tax credit of $2,000, so your taxes would be $25,000 - $2,000 or $23,000. Both lower the amount of taxes you pay, just in different ways.
According to the IRS website:
Things that are tax deductible include: charitable contributions, education tuition and fees, student loan interest, and self-employed health insurance.
Things that are tax credits include: childcare, mortgage interest, residential energy efficient property (solar panels, solar water heaters, etc), certain health insurance payments.
However (and with the IRS it seems like there are a lot of "howevers"), you may not be eligible to take some of these deductions or use some of these credits if your income is above a certain level.
Back to the question about childcare credits (now that we know they are credits and not deductions), it first depends on the state where you live. Not all states give credits and the types of credits and how the credit is calculated varies from state to state. Tax Credits For Workers and Families has put together a state-by-state interactive guide to childcare tax credits.
Next, the use of credits is also based on other factors, too. Tax-preparation company H&R Block has a guide to tax credit eligibility on their website to help you determine if you are eligible for tax credits. There are some basic requirements, like the child must be under 13 years old. You and your spouse must both have earned income. Sleep away camp doesn't count and neither does school for a student in kindergarten and higher. It gets more complicated when factoring in shared custody arrangements, and childcare that is provided by a family member.
Keep in mind that some things you read on the internet may be dated and many rules change year to year, so make sure you have the most up-to-date information. Consulting with a Certified Public Accountant is always helpful, as they are up on the latest rules, exceptions, and inclusions. If you are feeling brave and know your income, deductions and credits are fairly simple, many websites have free or low-cost tax preparation software you can use. Some have very good support and reference systems, too.
As complicated and confusing as this all feels, the good news is it could result in reducing the amount of taxes you need to pay. That's certainly worth the time it takes to untangle all the info. Just when you think you've mastered it all — 2018 brings about all new tax laws, so don't make yourself too crazy committing the 2017 stuff to memory.