Most tax credits phase-out for high-income earners.  Not this one and it also happens to be for expenses associated with caring for your kids (under the age of 13 that is).

Up to $3,000 Tax Credit and Maybe More
For 2010, the child care tax credit is 35% of qualified expenses but limited to $3,000 or up to $6,000 for the care of two or more children under the age of 13.  Those with incomes that approach and surpass $43,000 are limited to a tax credit equivalent to 20% of qualified expenses, up to $3,000.  Still, if you made a $1 million, you are eligible for the tax credit granted that your spouse also works or is a full-time student.  That’s the big catch, both eligible parents must have earned income (employment income, not investment income) or one is a full-time student and the credit amount is limited to the spouse with the least amount of income.  This means that if you work and earn $150,000 but your spouse doesn’t earn any income and is not a full-time student, you will not be eligible for the tax credit. Also keep in mind that the rules can get complicated if you are recently divorced or were taking care of the child for part of the year.  If this is the case, seek the advice of a licensed tax consultant.

What Expenses Count?
Generally eligible expenses include day-care, before and after school programs, nanny care & babysitting (but not if your teenage daughter is the sitter).  Sending your child to a private elementary school also does not count as that is considered an educational expense.

Flexible Spending Accounts May Be A Better Option
Parents with a child-care flexible spending account (FSA) may benefit more from using that money for child-care expenses than using out-of-pocket dollars to be eligible for the tax credit.  The FSA allows parents to use pre-tax dollars (before income taxes and Social Security/Medicare expenses are deducted) to pay for child-care expenses.  For instance, taxpayers in the 28% tax bracket would avoid paying 28% plus Social Security/Medicare 7.65% or 35.65% in taxes.  If you set aside the maximum $5,000 of your FSA to child-care expenses, you would be saving $1,783 in taxes.  You would be saving less or $1,000 (20% of $5,000) if you claimed that tax credit and earn income above $43,000.  So, it depends on the situation but the FSA could be a better option.

More Tax Questions?

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