Is Daycare Tax Exempt? 5 Requirements To Claim A Child Care Credit

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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?

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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.

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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.

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1Your Spouse Or Co-Parent Can Not Be The Care Provider


If you pay a family member, an in-home daycare, a tax exempt organization like a church, or a traditional childcare facility, you can receive the credit. But you are not eligible if the person you're paying to provide you with child care is your spouse, a parent of the child (such as an ex-husband or ex-wife), anyone listed as a dependent on your return (like a family member you care for or another child), or your own child that is 18 or younger, even if they aren't a dependent on your taxes.

2If You're Married, You Must File Jointly


You can only claim the tax credit if you file your taxes as single, married and filing jointly, head of household, or qualifying widow(er) with a dependent child, per the IRS. If you and your spouse separated during the year, but haven't finalized the divorce, you must file your taxes together if you hope to earn this credit.

3You Must Be Working Or Looking For Work


You can't earn the credit if your child's being cared for and you are not working, looking for work, unable to work per a disability, or a full-time student. This is strictly a credit for those who work in order to alleviate the burden of the expenses and applies to your spouse if you're married.

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4A Child Must Be 12 Or Younger When Care Was Provided


According to the IRS, the child must have been 12 or younger during the time of care in order for you to receive the credit.

5You Must Have Earned Income


Non-work income, such as profits from an investment, do not count notes Turbo Tax. The IRS makes it clear that you (and your spouse if you are married) must have earned income from wages, salaries, tips, net earnings from self-employment, or other taxable employee compensation.

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