John M. Hoffman & Associates CPAs

Frequently Asked Tax Questions

Child Care / Dependent Care Benefits

"What kind of numbers are we talking about here - day care is killing me!"

Unfortunately the limits are rather low when considering what good day care (especially in the Northeast) can cost. For the child care tax credit, the limit is $3,000 per year for up to 2 children - that is a maximum of $6,000 of expenditures that a credit is based on.

The credit depends on your income but for most taxpayers it is 20%. So this is real dollars, up to $1,200 for a family of two.   Don't forget that a credit is a dollar for dollar reduction of your tax, much more valuable than a reduction of your income.

For dependent care benefits (dcb), the limit is $5,000 per year per family. This means that if the husband does $5,000 at his place of work, the wife can NOT duplicate it. You could split it $2,500 each if you had some desire to complicate matters. If there is more than one child and you do the $5,000 of dependent care benefits, the remaining $1,000 getting you to $6,000 is available for the credit - $200 of credit for most.

Don't forget, the idea is to allow the 2nd spouse to work so the credit or "dcb" is based on no more than than the lower spouses earnings. In other words if your husband only earns $1,000 per year, the maximum credit will be based on $1,000 of expenditures, or the maximum amount of "dcb" will be $1,000.

A basic concept is that for either of these tax benefits to work, both husband and wife need to be working.