March 31, 2011
Families who have care-related expenses for qualified dependents are able to file for the federal Child or Dependent Care Tax Credit on Form 2441 with their 1040. There is no income restriction on this tax credit, but both parents must work, be looking for work or be full-time students.
Itemizable expenses include:
- Wages paid to a caregiver;
- Employer taxes paid on those wages;
- Fees paid to a placement agency in order to find the caregiver;
- Fees paid to a daycare or daycamp (overnight camps do not qualify).
Families with one child under age 13 can itemize up to $3,000 per year while families with two or more children can itemize up to $6,000 per year.
TAX CREDIT PERCENTAGE
The tax credit percentage is based on the family's adjusted gross income. Most families will get a 20% credit, which yields a direct tax reduction of $600 per year (for one child) or $1,200 per year (for two or more children).
FEDERAL EMPLOYER IDENTIFICATION NUMBER (EIN)
If you have a nanny, in order to take the credit you will need to have obtained a Federal EIN. That number should be applied to the nanny's wages and the employer taxes for that nanny. If you itemize fees paid to an agency or daycare, those expenses would utilize the companies' EIN (Note: if you've already reached your expense limit with the nanny's wages, there is no need to chase down these business EINs). In addition, you'll need to make sure you follow the other federal and state nanny tax obligations.
Let us know if you have any questions.