Child Care Expenses

If you paid child care expenses in 2006, you may be entitled to a credit on up to $6,000 of the expenses. If the expenses were reimbursed through your employer's dependent care benefit program, up to $5,000 in benefits may be excluded from your taxable wages. Here's how these tax breaks work.

First, the expenses must be for the care of a qualifying person. A qualifying person is a person who lived with you in 2006 and met one of these descriptions in 2006:

• A child under the age of 13 you can claim as a dependent.
• A disabled spouse.
• A disabled dependent, or person you could claim as a dependent but for the fact that his or her gross income was more than $3,300 in 2006.
• Under certain circumstances if you are divorced or separated, a child under age 13 or a disabled child who is not your dependent. Click here for details.

In addition, the expenses must be for qualified expenses, typically the cost of a day care center or babysitter. Private school (first grade and up), overnight camp, clothing and entertainment are NOT qualified expenses.

Finally, you must meet these requirements:

• You are NOT married filing a separate return. However, you may qualify for an exception to this rule. Click here for details.
• You incurred the expenses so you and your spouse could work, or look for work. Special rules apply if your spouse was a student or disabled.
• You and your spouse paid over half the cost of keeping up your home.
• The caregiver was not your dependent, your spouse, or your child under the age of 19.

A few other noteworthy items:

• Qualifying expenses are limited to the smaller of your earned income or your spouse's earned income.
• You will need to report the amount of expenses paid to each care provider, along with the care provider's social security number or employer ID number.
• Although you may have qualifying expenses of $6,000 for purposes of the credit, your credit is a fraction of your expenses. The credit ranges from 20% to 35% of eligible expenses, depending on your income. The higher your income, the lower the percentage of the credit. TaxCut will automatically compute the appropriate credit.
• If you received tax-free dependent care benefits from an employer, the amount is subtracted from the $6,000 limit on expenses eligible for the child care credit, so you can't double-dip.
• Be sure and complete Schedule H if you had a household employee in 2006.
• Until 2003, the amount that could qualify for the credit was limited to $2,400 for the care of one child and $4,800 for the care of two or more. And, the limit on dependent care benefits was $5,000. Now, up to $3,000 of expenses for the care of one child and up to $6,000 for the care of two or more can qualify for the credit. Unfortunately, Congress did not lift the $5,000 limit on dependent care accounts. So, if you pay your child care bills with funds from reimbursement account, you can only funnel $5,000 through the account. If you pay more for child care, you'll need to claim the credit for the excess — up to a combined total of $6,000 if you're paying for the care of two or more children. In other words, even if you use the full $5,000 dependent care benefit, you could still claim a credit on up to $1,000 of qualifying expenses.