You need someone to watch your young children or adult dependent during the summer and after school, while you and your spouse work or attend a full time school.
IRC (Internal Revenue Code) Section 21, Expenses for household and dependent care services necessary for gainful employment. IRC section 21 provides a credit for taxpayers who incur child care or dependent care expenses that allow the taxpayers to be employed. Limits are imposed on the amount of the credit.
The dependent care credit is available if your relative watches your children so you and your spouse can be gainfully employed or attend a school. The credit is for middle to upper income families is equal to 20% of the first $3,000 of qualified expenses for a child under age 13 and 20% of the first $6,000 of qualified expenses for two or more qualified children. Thus, if you have three children under age 13 and pay someone to watch them, the maximum credit you can claim is $1,200 (20% of $6,000).
To qualify for the dependent care credit, you must meet the following requirements:
- The child must be your biological child, adopted child, step-child or foster child.
- The child must live with you for more than half the year (counting time away from home for school or traveling).
- The child must be younger than 13 or permanently and totally disabled regardless of age, who is physically or mentally incapable of self-care.
- You must provide more than half the cost of keeping up a home in which you and your child live during the year. (If your child has a trust fund or other income, the trust can’t provide more than half the support.)
- The expenses must be incurred for you (and your spouse, if married) to be gainfully employed. The requirement for “gainful employment” is satisfied if one spouse is a full-time student while the other works. Remember that a tax credit is more valuable than a deduction and reduces your tax bill on a dollar-for-dollar basis.