The American Taxpayer Relief Act of 2012 permanently extended some tax relief credits for families and children. The Act permanently extended the expanded child and dependent care credit from The Economic Growth and Tax Relief Reconciliation Act of 2001. Generally, you are eligible for a tax credit if you pay someone to watch a qualifying dependent so that you can be gainfully employed. Qualifying dependents include a dependent child under the age of 13 or a disabled adult dependent who is unable to care for himself.
Taxpayers are eligible for a maximum credit of $1,050, or 35% of qualifying expenses of up to $3,000 per year for the care of one child. For the care of two or more eligible dependents, the maximum credit is $2,100, or 35% of up to $6,000 of qualifying expenses. It is important to note that you must reduce your qualifying expenses by any amounts provided by a dependent care benefits plan through your employer.
For taxpayers with incomes of $15,000 or less, the applicable percentage is 35%. The percentage is reduced by 1% for each $2,000 of income over $15,000, until the percentage reaches the 20% level for income of more than $43,000.
While this benefit was designed to help low-income working taxpayers with children, middle and upper-income families can benefit as well. Qualifying expenses can include the in-home related expenses of a housekeeper, babysitter or cook. If the daycare center cares for more than six children, services performed are allowed only if the center is certified and in compliance with all local laws. Day camps often qualify for the credit. A portion of boarding-school expenses may also qualify for the credit, but fees paid for sending your child to an overnight camp are specifically not allowed.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.