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Child Care Expenses and Your Taxes

Child care can be expensive. To relieve some of the burden of child care expenses from working families, the IRS offers several ways to offset part of your child care costs on your taxes. These include:

  • Dependent Care Assistance Plans, most commonly offered as dependent care flexible spending accounts (FSAs)
  • Child and Dependent Care Credit

Dependent care FSAs are an employer-provided benefit that enables taxpayers to exclude up to $5,000 ($2,500 if married filing separately) of child care expenses from your taxable wages. This reduces your taxable income so that you ultimately owe less tax.

The Child and Dependent Care Credit is a tax credit that reduces your tax owed. Depending on your adjusted gross income (AGI), the credit is figured using up to 35% of qualifying child care expenses (up to $3,000 for 1 child or $6,000 for 2 or more children).

However, you cannot claim child care expenses reimbursed under a dependent care FSA when figuring the Child and Dependent Care Credit, so in most cases you'll need to pick one or the other when preparing your return.

Confused yet? A general rule of thumb is that if your tax bracket is higher than 15%, utilizing a dependent care FSA is a better option to maximize your tax savings. If your employer does not offer dependent care benefits, or your tax bracket is lower than 15%, you're probably better off claiming the Child and Dependent Care Credit.

For more information, or for tax advice tailored to your specific tax situation, don't hesitate to call Taxation Solutions, Inc. With 40+ years' experience providing tax resolution, we have the expertise you can rely on for knowledgeable guidance and superior outcomes. Contact us today!