Childcare tax credits for both employers and working parents
Wednesday, June 12, 2024
Youngsters are school-free for the next few months. That means working parents are searching for ways to keep their children occupied. And supervised.
Many teenagers get summer jobs. Parents of pre-teens often turn to day camps to fill a few hours each workday.
But when it comes to preschoolers, childcare is a year-round concern, and an increasingly expensive one.
Rising childcare costs: A recent report from Child Care Aware of America (CCAoA), a Washington, D.C.-based nonprofit, found that in 2023 the national average price of childcare for 2023 was $11,582. To put that amount in the context of another key household cost, the CCAoA data show that the care costs put major stress on both homeowners and renters. Specifically —
- In 45 states plus the District of Columbia, the average annual price of childcare for two children in a care center exceeded annual mortgage payments from 1 percent to 64 percent.
- In all 50 states plus the District of Columbia, the price of center-based care for two children exceeded average annual rent payments by 25 percent to more than 100 percent.
Facing such daunting cost choices forces many parents to get creative in finding childcare options. But Uncle Sam offers some help, for both for employers and working parents, via a couple of tax credits.
Childcare credit for businesses: The Employer-Provided Childcare Tax Credit offers business a tax incentive to provide childcare services to their employees.
The business tax break offers employers a credit up to $150,000 per year to offset 25 percent of qualified childcare facility expenditures, and 10 percent of qualified childcare resource and referral expenditures.
A qualified childcare facility is one that meets the requirements of all laws and regulations of the state or local government in which it’s located.
Business eligibility rules: In order to claim the tax credit, an employer must have paid or incurred qualified childcare costs during the tax year to provide childcare services to employees.
Qualified childcare costs are —
- Costs associated with acquiring, constructing, rehabilitating. or expanding property used as the taxpayer’s qualified childcare facility.
- Operating expenses paid by the business, including amounts paid to support childcare workers through training, scholarship programs, and providing increased compensation to employees with higher levels of childcare training.
- Qualified resource and referral costs which include amounts paid or incurred under a contract with a qualified childcare facility to provide childcare services to employees of the taxpayer.
Claiming the employer-provided childcare credit: Employers must file Form 8882, Credit for Employer-Provided Childcare Facilities and Services, to claim the credit. The nine-line form is shown below.
The credit is part of the general business credit subject to the carryback and carryforward rule. This means employers may carryback unused credit one year, and then carryforward 20 years after the year of the credit.
Taxpayers whose only source for the credit is from pass-through entities can report the credit directly on Form 3800, General Business Credit.
If you’re a business owner interested in providing this benefit for your employees, check out the IRS Employer-Provided Childcare Tax Credit page at IRS.gov. And, of course, talk with your company’s tax adviser.
Childcare credit for parents: Parents who don’t work at companies that offer on-site childcare must find their own facilities.
The Child and Dependent Care Credit can help these working moms and dads recoup at tax filing time some of their care center costs. It will get qualifying filers up to a maximum $1,050 for the care of one child, or $2,100 for costs related to caring for two or more youngsters.
As the CCAoA report shows, that’s not going to make a bit dent in the childcare costs most parents must pay. But since the tax break is a credit, it means it provides a dollar-for-dollar reduction of any tax the claiming parents might owe.
For example, if you get a $2,100 childcare credit and owe $1,800 in taxes when you file, you can zero out that $1,800 tax bill. But since the Child and Dependent Care Credit is nonrefundable, that’s as far as the credit coverage goes. You won’t get the excess $300 from your credit claim as a refund.
Still, any amount to help with childcare costs is welcome.
Calculating the individual childcare credit: Of course, since we are talking federal taxes, the tax benefit is not entirely straightforward.
First, the dependent child for whom care costs are incurred must be younger than age 13 when the care was/is provided.
Then, there’s a limit on the total costs you can use to claim the credit. For the 2024 tax year, you can count up to $3,000 spent to care for one child, or $6,000 for two or more youngsters. Again, not all your costs, but some.
Finally, you must figure just how much of those qualifying costs can be used to get any credit amount. Your final claim is a percentage of your care expenses, ranging from 20 percent to 35 percent, depending on your adjusted gross income (AGI).
Basically, the credit is larger for lower-income earners. They can claim up to 35 percent of their qualifying childcare costs. The percentage amount drops to 20 percent for parents with AGI exceeding $43,000. And no, that AGI amount is not indexed for inflation, so every year it loses a bit of its real-life value due to increased living costs.
You can find more on claiming the credit for childcare costs in my post Got kids? Let Uncle Sam help pay for their care via a tax credit.
You also might find these items of interest:
- 6 tax credits for lower-to-middle income taxpayers
- Determining child-related tax breaks when you're divorced
- Moms still waiting on this Mother’s Day for increased Child Tax Credit gift from Congress
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