Care services eligible for credit:
Private home nurses.
Licensed dependent-care centers.
Nursery school and kindergarten costs. In these cases, if the costs of school are separate from child care expenses, only the child care portion qualifies.
Household help as long as the services are necessary for the well-being and protection of the qualifying indi...vidual.
Actual care cost limits
The first thing to keep in mind is that the credit probably will not pay for all of your child care costs. The IRS limits the dollar amount you can claim and you only get to count a percentage of that amount.
You can claim only up to $3,000 for the care of one person and $6,000 for two or more. Then this amount is further reduced based on your overall income (more on this later).
There is some good news, however. If you paid someone to watch over your two (or more) kids, you can combine all your care costs to reach the $6,000 limit.
In the case of Janie and Jimmy, their folks could count the $2,800 for Janie's care and $3,200 for Jimmy's in order to claim a total of $6,000, instead of only $5,800 by adding $2,800 plus $3,000. By using the total amount rather than splitting the actual costs and then applying the limits and figuring the credit, they'll get a larger tax break.
The second limit is the percentage of costs that you can claim. Once you determine your allowable expense amount, your actual credit is limited to a percentage of that figure.
So regardless of how much you pay, the potential maximum child and dependent care credit is $1,050 (35% of $3,000) for the care of one person, twice that for two or more. Depending upon your income, the percentage range drops from 35% to 20% of your allowable care costs.
The 35% rate is only for lower-income taxpayers. If you make more than $15,000, the credit percentage is incrementally phased down by salary range until it hits 20% for those earning more than $43,000.
And even if your care costs come up to the maximum credit amount, you may not get it all if your tax bill is less than your allowable credit. The dependent care credit is not refundable, meaning it can only take your tax bill to zero. Any excess credit is not usable.
For example, if you claim a $1,050 maximum credit for the care of one child and owe $750, the IRS will use your credit to wipe out your tax bill, but you won't get the extra $300 as a refund.
If you pay for child care, you can claim this credit to help offset some of your costs as long as your child meets IRS guidelines.
The youngster must be younger than 13. He or she also must meet the requirements set out in the IRS' dependent requirements. Basically, this means the child must be related to you and live with you most of the time. There are exceptions in the cases of divorced or separated parents, so read the tax filing instructions carefully or consult your tax adviser if this is your situation.
But the child and dependent care credit is not limited to child care costs. It also can be claimed when you pay for care of other dependents as they are deemed qualified by the IRS. For example, if you pay someone to look after your spouse or a dependent of any age who is incapacitated because of physical or mental limitations, you might be eligible for this tax break.
Only working taxpayers need apply
Then there's the credit's job catch. You can only claim dependent care that was necessary so that you can go to or look for work.
If you're married, the IRS requires both of you to be employed or seeking a job. The only exception is when one spouse is either a full-time student or is physically or mentally incapable of self-care.
After clearing the employment hurdle, other requirements to claim the credit include:
A filing status of single, head of household, married filing jointly or qualifying widow or widower with a dependent child. In most cases, married taxpayers who file separate returns cannot claim the dependent care credit.
The payments for care cannot be made to someone you can claim as your dependent on your return or to your child who is younger than age 19.