Parents are Using Small Loans to Fund Childcare, But There is Help
The Child and Dependent Care Tax Credit
It may take a small loan to fund child care these days, but there are ways to manage. The Child and Dependent Care tax credit is a new credit the government has initiated to help consumers cut their tax liabilities. There are some eligibility requirements, but overall it is another good way to eek down a high tax bill. Here are some of the basics of the Child and Dependent Care tax law.
How much does the credit pay?
The tax credit does not pay for all of your child care costs—that isn’t its goal. Rather, it is set up to aid parents in their difficulties. The IRS limits the amount parents can claim and once you reach that, you only get a percentage of that cost back. A parent can claim up to $3,000 for one dependent or up to $6,000 for two or more dependents. As long as parents keep records of spending on child care, they should be able to combine tax cuts and benefit nicely.
The limits on the tax cut
Next there are limits to address regarding the tax cut. Once you figure out how much you pay in child care costs, you get to take off a percentage of it to figure out your actual tax credit. That means that the maximum credit is $1,050, or 35% of the $3,000 limit. The 35% rate, however, is for low-income taxpayers. If your salary is higher, you could be eligible for only 20%.
When it comes to your dependents, the formal definition of “child” as per the IRS must be adhered to. The child must be under 13, related to you and live with you the majority of the time. Divorced parents have different clauses, but in general these are the requirements. The Child and Dependent Care credit also covers dependents who are incapacitated for some reason, either physically or mentally. There needs to be the proper documentation, but if you are providing care for any child or dependent, you should take advantage of this tax law.
There also is a job requirement. To claim the tax break you have to be employed and if you are married, both partners have to be employed. There are other tax filing requirements and a tax consultant should be utilized to remain in compliance with the law. Jamie Breuer, small loan and tax consultant, said, “Many people don’t know the vast amount of tax breaks out there. In particular now after the recession there is a whole new family of laws that everyone should be taking advantage of.”
In addition to dependents, tax filers also need to cite their child’s caregiver and be able to provide employer identification numbers if applicable. Things like daycare providers and summer camp providers should not be ignored. In addition, private home nurses, licensed caretakers, nursery school costs, and household help can all be included in the tax preparation process and cut down on tax liabilities. The costs of care for children and dependents is not set to decline any time soon, so parents need to have tools to bring down their tax liabilities. Though in the past they had to use small loan products, savings and outside help, today the government is offering some much-needed assistance.