Offsetting the High Costs of Child Care

Many parents are dismayed at the astronomical fees for child care. Fortunately, some relief is available in two forms:

  • The dependent care tax credit
  • A deduction through an employer-sponsored dependent care assistance program.

Be advised that current law prevents “double-dipping” in both the Dependent Care Assistance program and claiming of a Dependent Care Tax Credit.

To claim the Dependent Care Tax Credit, you will need to complete Form 2441.

If your employer-sponsored benefits include a Dependent Care Assistance program, you will be offered the opportunity to pay for qualified care with pre-tax dollars. Money set aside via payroll deduction in such a program lowers your adjusted gross income similar to how money set aside in a retirement program such as a 401(k) plan lowers your taxable income.

The decision about which program is right for you is usually based on your marginal tax rate. Talk with your tax preparer or do some research (and math) to figure out which program provides the biggest bang for your child-care buck.

– Timothy Wyman, CFP, JD

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