Childcare IRS Tax Credits
Families can claim up to $3000 per annum for one child, and up to $6000 per annum for two children or more for a maximum IRS Tax Credit of $2100. This amount is reduced based on your income down to 20% of the expenses above. Hence you may only receive $600 or $1200 as an IRS Tax Credit respectively if your income is above $43,000. You must have earned income and be actively working or seeking work. Be sure to read IRS Publication 503 to follow the eligibility guidelines and file form 2441 with your annual tax return.
Childcare Tax Credit Example - How to Reduce your Childcare Costs
In 2015, a family with two children earns $80,000 per year. Both parents are working and need around 7 - 8 hours of childcare services per week, spending $6000 for the whole year.
Total Annual Childcare Costs = $6000
Total Annual Hours of Childcare = 400
Average Childcare Cost = $6000 / 400 = $15 per hour
IRS Tax Credit = $1200
Total Annual Childcare Costs After Tax Credit = $6000 - $1200 = $4800
Average Childcare Cost After Tax Credit = $4800 / 400 = $12 per Hour (20% Discount)
Flexible Spending Account (FSA) for Dependent Care
This is not the same Flexible Spending Account that is usually referred to in your health insurance. This FSA is set up by your employer and is a "dependent care FSA". You can set aside up to $5000 pre-tax per annum for upcoming childcare expenses. However, the FSA is a "use it or lose it" plan, so if you you don't spend it all by December 31st, it does not carry over to the next year. The FSA works on a reimbursement basis, so you will need to keep all childcare receipts and submit them accordingly.
FSA Dependent Care Example - How to Reduce your Childcare Costs
In 2015, a family with two children earns $80,000 per year. Both parents are working and need around 7 - 8 hours of childcare services per week, spending $6000 for the whole year.
Total Annual Childcare Costs = $6000
Total Annual Hours of Childcare = 400
Average Childcare Cost = $6000 / 400 = $15 per hour
Estimated Tax Savings = $1582.50
Total Annual Childcare Costs After Tax Savings = $6000 - $1582.50 = $4,417.50
Average Childcare Cost After Tax Credit = $4800 / 400 = $11 per Hour (27% Discount)
In the above two examples, we see that the tax benefit amount that you get by using the FSA is slightly better than the IRS Childcare Tax Credit. However, try using this calculator based on your individual circumstances to see what works best by running several scenarios of your situation, or contact a financial advisory firm like Hedges Wealth Management.
Many families who use in-home childcare like babysitters and nannies in Charleston SC, Charlotte NC, Miami FL or Atlanta GA either pay cash or check. This is usually done under the table and no employee taxes or income taxes are paid. Hence, if you are planning on using the FSA or Childcare IRS Tax Credit to offset expenses, then you need to be honest about it. Use a sitter / nanny on demand application like NannyPod based in Charleston, South Carolina. Nannypod charges a $20 annual membership fee plus hourly package fees. In return, they handle all babysitter taxes, keep electronic records of your childcare hours, send you receipts and a reminder in January to file the correct IRS Form 2441 with your tax return. The app allows you to see availability of local background checked NannyPod sitters and nannies, check out reviews, and request them instantly one-time or on a recurring basis. The tax benefit and reduction in cost per hour of a babysitter, nanny or any childcare center is well worth it.
Whatever situation you and your family are in with regards to childcare, from a financial planning and advisory perspective, it's important to utilize the tools that the government and IRS allow in the best manner to stay ahead financially.
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Hedges Wealth Management.
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