How the IRS Subsidizes Childcare Expenses

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Certain expenses in life are a given.

Expenses like your mortgage or rent on your home, utility bills, groceries, and car payments are a part of everyday life.

For most families in America, this list also includes childcare. But most people have no idea just how expensive this can be.

The average American family spends over $8,000 per year on daycare for one child under the age of five. 

This amount can double, or even triple depending on how many kids are enrolled and their ages. Infant and toddler care are significantly more expensive.

The good news is, childcare expenses are tax-deductible. Keep reading to learn the ins and outs of how the IRS subsidizes childcare expenses and how to make these subsidies work in your favor.

Tax Education Childcare

Childcare Subsidies Explained

recent survey performed by Care.com showed that the average family is currently spending 20% of their income on childcare.

 We live in a world where parents have to work to pay the bills but also need quality childcare. Knowing how to get tax subsidies and reimbursement is crucial for staying financially afloat.

It’s important to note that childcare is designated as care for children under the age of 13. This age can be extended if the child has disabilities. 

There are three main types of subsidies available – tax, government, and employer. Let’s take a closer look at the requirements for each and if you qualify.

Tax Subsidies

The IRS offers a few different subsidies which families can combine to get the most savings.

Child Care and Dependent Care Tax Credit (CDCTC)

This is one of the most popular tax subsidies for childcare expenses and allows families to claim up to $3,000 in childcare costs. Per child, with a $6,000 max. 

As tax season approaches, ask your childcare provider to give you a comprehensive receipt of expenses paid in that calendar year.

If you have two children enrolled in daycare and hit the $6,000 maximum expense claim, you’ll save approximately $600 per child or a total of $1,200.

If you plan to use a Flexible Spending Account through your employer (more on this later), you need to perform additional calculations.

 Be sure to consult your accountant or an experienced tax attorney to guarantee you’re getting the most savings.

Child Tax Credit

Outside of childcare expenses, you’re also eligible for a child tax credit following the birth of your child or children. This means up to $2,000 in savings annually for each child under the age of 17.

Earned Income Tax Credit

In order to qualify for the Earned Income Tax Credit, you have to fall under the low- to the moderate-income bracket. If you do qualify, your savings may be substantial, depending on what your filing status is and how many children you have.

Government Subsidies

The government offers several programs and subsidies to help working families offset childcare expenses. 

Unfortunately, the plans and subsidies offered vary from state to state. You need to check your state’s requirements and regulations to find out exactly what programs they offer and if you qualify.

Most government subsidies are based on your income, and the number of children enrolled. Some daycare facilities require families to prove attendance and pay a co-pay to offset childcare costs not covered by government programs. 

There are also subsidies available for members of the U.S. military. Amounts and coverage differ for each branch of service.

Employer Subsidies

Most employers realize that keeping quality employees means offering assistance with childcare expenses. 

Employer subsidies are growing in popularity and availability. Here’s how it works.

Flexible Spending Accounts

Companies that offer a Dependent Care Account allow employees to earmark as much as $5,000 in non-taxed funds to pay for childcare. 

It’s important to note that each family is limited to $5,000, which means even if both yours and your spouse’s job offer an FSA option, you can’t exceed this amount combined.

Remember the childcare and dependent tax credit mentioned earlier? Families using a Flexible Spending Account can still take advantage of this tax credit if their childcare expenses exceed the amount they’ve set aside. 

First, you need to calculate your expenses using the CDCTC formula – $3,000 per child or $6,000 per family. If this amount exceeds the amount of money deposited in your Dependent Care Account, you can claim a CDCTC credit for the difference. 

For example, a family with more than one child can claim up to $6,000 under the CDCTC guidelines. If that same family also set aside $5,000 in an FSA, they can claim the difference of $1,000. 

Child Care Network Programs

Similar to health care programs where members are required to visit specific doctors, a childcare network program offers employees reduced childcare costs when employees enroll their children in particular applications within the program.

In-Home Care vs. Daycare

More and more families are hiring in-home babysitters or nannies to care for multiple children. If this describes you, you’re probably wondering if these expenses are tax-deductible. 

The short answer is yes – but with stipulations (of course). 

The person you hire to watch your children in your home must meet the following criteria:

  • They can’t be your spouse or the parent of your child
  • They can’t be an older sibling under the age of 19

If your nanny is a family member, you need to determine whether or not they’re acting as an independent contractor or as your employee. This will determine which of you is responsible for paying income tax.

If the family member is acting as your employee, you’re responsible for withholding and paying payroll taxes. If your family member isn’t acting as your direct employee, they’re responsible for paying self-employment taxes and income taxes on their earnings.

The Employer’s Supplemental Tax Guide and the Household Employer’s Tax Guide will help you determine how to categorize your arrangement. 

Tax Education Childcare

Get the Most Return on Your Child Care Expenses

Paying for childcare is a necessary evil for many working parents. They need to work to pay the bills, but they also need to pay for childcare in order to work.

If you’re struggling to calculate your childcare expenses or feel confused about what tax subsidies you’re entitled to, we can help.

Contact us today and let one of our experts help you navigate childcare expense tax credits and help you get the most of your return.

Managing Partner of Silver Tax Group, author of the book “Stop the IRS”. Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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