Taxes are top of mind this time of year and chances are you have a few questions about how to do taxes for the year of COVID-19. Parents in particular will want to get the most credit for their child’s expenses as possible, which leads to the question if daycare expenses are deductible. Considering the average costs of daycare for two children counts for over 20% of a two-person annual household income, there has to be a deduction. Unfortunately there isn't a deduction, but there is a federal tax credit that can help you out with your child care expenses. The credit reduces your taxes dollar for dollar. For example, if you're eligible for a $1,000 child and dependent care credit, your taxes due will be cut by $1,000. The IRS notes that depending on your adjusted gross income (AGI), the credit can be up to 35% of your qualifying expenses. The maximum amount of child care expenses you're allowed to claim for one child is $3,000, and $6,000 for two children. Regardless of your (if any) child care expenses or your income, you're eligible for the child and dependent care credit if you meet these requirements:
*You can only claim the tax credit if you file your taxes as single, married and filing jointly, head of household, or qualifying widow(er) with a dependent child, per the IRS. Your child (or children) must have been 12 or younger during the time of care.
*You must have earned income from wages, salaries, tips, net earnings from self-employment, or other taxable employee compensation. Non-work income, such as profits from an investment do not count.
*And if you pay a family member, an in-home daycare, a tax exempt organization like a church, or a traditional childcare facility, you are eligible for the credit. But you are not eligible if the person you're paying to provide you with child care is your spouse, a parent of the child (such as an ex-husband or ex-wife), anyone listed as a dependent on your return (like a family member you care for or another child), or your own child that is 18 or younger, even if they aren't a dependent on your taxes.
Before filing or deciding to take the tax credit, talk with your tax preparer for more details and defiantly bring it up to get the most out of your refund.