Are you a working parent looking for ways to ease the burden of child care expenses? There are several tax-saving strategies available to you.
First, there’s the dependent care tax credit, a direct reduction to your tax liability. The amount of the credit depends on the amount of your child care expenses, your adjusted gross income, and how many children you have. The maximum credit is 35% of your costs for child care while you work or go to school, up to a limit of $3,000 for one child and $6,000 for two or more children.
Next, there is the flexible spending account, an arrangement set up by some employers which allows employees to set aside pre-tax dollars to be used for child care expenses. However, you should be careful when establishing this type of account because there is some risk involved. If your dependent care costs for the year are less than your contributions to your account, you could forfeit the unused balance. Also, any tax-free reimbursement from the account reduces your eligible expenses for the dependent care tax credit.
Finally, you may have an employer who is taking advantage of a new business tax credit for providing child care services for employees. Employers who provide such benefits can receive a tax credit of up to $150,000, depending on the actual costs of running the child care center. If you are lucky enough to receive this benefit, your employer will report the total amount of your dependent care benefit on your form W-2. The first $5,000 of this benefit is not taxable, but any benefit over $5,000 per family will be included in taxable wages.
Give us a call if you would like more information about the restrictions and requirements involved with these tax-saving opportunities.