Child Care Deduction vs. Credit

by Maggie McCormick

The cost of child care is a large expense and can reach into the thousands annually, depending on your area. The government encourages you to work by offering either a tax deduction or a tax credit for your child care expenses. Turbo Tax states that the child care deduction is one of the most overlooked tax deductions.

Qualifying and Qualified Expenses

To qualify for either program, both you and your partner must have earned income or be a full-time student. The income doesn't necessarily have to come from a traditional employer, though; freelance worked or commission-based sales also count. Qualified expenses include any type of expenses that directly relate to the care of your child. This could be through a nanny or babysitter or a formal center. Private school tuition does not count as a qualified expense, though a private preschool would qualify, assuming your child is too young to go to public kindergarten. Before- or after-school expenses are qualified expenses.

Child Care Deduction

To receive a deduction for child care expenses, you must set up a flexible spending account through your employer. This option may not be available to everyone and you cannot take the deduction on your own. Through this account, you can set aside up to $5,000 for a couple ($2,500 for a single parent). The money is taken out of your paycheck and you are then reimbursed for your expenses from money in the account. You must show receipts or other proof of payment to get your reimbursements. Money in the flexible spending account is "use it or lose it" -- if you don't spend all the money in the account, you lose that money. Plan accordingly and take out the correct amount.

Child Care Credit

The child care tax credit equals 20 to 35 percent on child care costs up to $3,000 for a single child or $6,000 for two more more children. Since it's a credit, it applies toward any taxes you owe, though you can get a refund. Those who earn less than $15,000 will receive the full 35 percent, while those earning over $45,000 will only get 20 percent.

Best for You

You cannot get both the full deduction and the full tax credit. BabyCenter states that lower-income families will usually see more benefits from the tax credit, while higher-income families do better with the deduction. Turbo Tax points out, however, that the limit for expenses for the child care credit is higher than the limit for the deduction. If you take the full deduction and still spend more on child care, you can also count the difference toward the tax credit.

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