Once families find a qualified, trustworthy nanny, the next step is making sure their finances are in order. As long as the nanny is paid on the books, the vast majority of families will be eligible to take the Child or Dependent Care Tax Credit for their 2024 tax returns. However, according to the IRS, only about 6.4 million families apply for the Child Care Tax Credit each year.
In this article, we’ll go in-depth about this tax break to cover how it can ultimately impact your family’s overall financial situation. Understanding each element of the Child or Dependent Care Tax Credit is essential for maximizing the benefits and ensuring that families are not leaving valuable dollars unclaimed.
Table of contents:
- The qualifications for taking the child care tax credit
- The expenses you can apply to the tax credit
- How to claim the credit on your taxes and what you can save
- A budget scenario using the child care tax credit
What are the qualifications for the Child Care Tax Credit?
Families can claim a child care tax deduction as long as they meet the following three requirements:
- The care must be for a child under the age of 13;
- Your family must need child care because both you and your spouse work, are looking for work or are full-time students;
- You must have qualifying child or dependent care-related expenses.
What expenses can I apply to the Child Care Tax Credit?
According to the IRS, you can apply any child care expense that is for the well-being and protection of your child. A few examples of qualifying expenses are:
- Your nanny’s wages.
- Fees paid to a placement agency to match your nanny with your family.
- The household employer taxes paid on top of the nanny’s wages.
- Dues for enrolling your child in a day care facility.
- Tuition for a day camp (overnight camps are excluded).
How do I claim the Child Care Tax Credit on my 2024 taxes?
You will need to file IRS Form 2441 with your personal federal income tax return in order to claim the Child Care Tax Credit. The form asks for your care-related expenses for the calendar year and then calculates your savings based on a percentage determined by your adjusted gross income (AGI). The credit can be as much as 50%, but most families will see a 20% savings.
You are limited on how much in child care expenses you can claim, based on how many kids you have. The expense limit is $3,000 for one child or $6,000 for two or more children. That means the majority of families can expect to save up $600 if they have one child and up to $1,200 if they have two or more children.
Child Care Tax Credit savings scenario
A family hires a nanny to watch their two daughters ages 5 and 3 during the weekdays while they’re at work. They pay their caregiver $29,000 for the year, withhold the appropriate taxes from them and pay the required employer taxes. The family’s cost as a household employer breaks down like this:
|
Gross Wages for the Nanny
|
$29,000
|
|---|---|
|
Social Security Taxes
|
$1,798
|
|
Medicare Taxes
|
$420.50
|
|
Unemployment Insurance Taxes
|
$258
|
|
Total Employer Taxes
|
$2,476.50
|
|
Total Cost (before tax breaks):
|
$31,476.50
|
Since both parents work full-time and their children are under 13 years of age, they qualify for the Child Care Tax Credit. Their income level translates to a 20% tax credit which they can take on $6,000 of their child care expenses. This means the family will receive a tax break of $1,200, bringing their total cost to hire their nanny down to $30,276.50. The Child Care Tax Credit has offset about half of this family’s household employment tax liability.
What the example above should illustrate is that if you have qualifying child care expenses, you should always take advantage of the Child Care Tax Credit. Use our budgeting calculator to see how much you can save and visit our tax breaks page for information on other deductions you can take.
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