Improved Child Care Credit Expiring After 2010

You may not remember this, but way back in the days before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001) parents had much lower credits for child care (this article also applies to other dependent care credit as well).

Now Through 2010

Until the end of 2010, the credit allows for a range of between 20% (for an AGI over $43,000) to 35% (for an AGI of $15,000 or less) of the smallest of:

• $3,000 ($6,000 for two or more qualifying children or dependents),
• The total of the qualified dependent or child care expenses incurred and paid,
• The taxpayer’s earned income, or
• The spouse’s earned income

For example, a family of four with both parents working full-time might pay $100 a week for childcare.  Since most daycare outfits require payment even when the child isn’t in attendance, this works out to 52 weeks at $100 per week, or $5,200 in qualified child care expenses.  For the sake of example, the household AGI is assumed at $55,000.

Under the current formula, this family can expect a tax credit for child care expenses of 20% of the total of their qualified expenses ($5,200) – a credit in the amount of $1,040.

Beginning in 2011

With the expiration (at the end of 2010) of the provision changing the credit, the credit amounts and income levels will revert back to the pre-2001 levels.  Under the old (and soon to be new) levels, the credit ranges from 20% (for AGI over $28,000) to 30% (for AGI of $10,000 or less) of the smallest of:

• $2,400 ($4,800 for two or more qualifying children or dependents),
• The total of the qualified dependent or child care expenses incurred and paid,
• The taxpayer’s earned income, or
• The spouse’s earned income

Using our family from the example above, under the new formula the family can expect a tax credit for child care expenses of 20% of $4,800 (their $5,200 exceeds the upper limit) – a credit of $960.  This is $80 less in tax credit versus the old method.

Photo by Photos.com

I can learn from you, you can learn from me - please leave your comments and links!

Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author