In the US, are day-care expenses tax deductible? And if so under what conditions?
For example, if one parent is working, but the other is still going to (graduate) school, is any kind of deduction possible?
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They're not deductible, but you can receive tax credit for these expenses. See the IRS publication 503 on the matter. The credit is up to $3K for one child or up to $6K for more than one child, provided both parents work and have earned income, and the credit doesn't exceed the actual un-reimbursed expenses/limits.
Read the pub for the full details and examples and form references (start with form 2441).
You have two choices depending on your exact situation you might use either: the tax-credit or the flexible spending account (FSA). You can't use both unless more than one child in involved.
The first thing to determine is if your company ha the flexible spending account for dependent care. If they do and you want to use it you either signup during open season, or within 30 day of the birth of your child.
The tax credit is also a possibility.
You will have to run the numbers to see which one makes the most sense. Because you to signup in advance for the FSA you need to decide before the child is born which you will do.
Here is the IRS info regarding child care expenses:
Regarding one spouse in school:
Rule for student-spouse or spouse not able to care for self. Your spouse is treated as having earned income for any month that he or she is:
A full-time student or
Physically or mentally not able to care for himself or herself. (Your spouse also must live > with you for more than half the year.)
There are rules regarding age of children and income. There are also rules regarding who can be considered the caregiver, and documentation required.
In terms of the differences between the Dependent Care FSA and the Childcare Tax Credit, the general advice is that the FSA is the better choice where it is available, because it allows you to avoid paying FICA and Social Security taxes on the income excluded in this manner.
Of course, if you are unable to use the FSA because it is not available through your employer, the Childcare Tax Credit is available ($3000 per child up to $6000 total). If you have two children in daycare/childcare, you may claim the last $1000 of the Childcare Tax Credit if you took the first $5000 for the FSA.
If you can use a Flex125 pre-tax spending account. Last time I used this program was several years ago. You are limited to $5,000 per year total, not per child, and if you don't use all the money you've set aside, you lose it, so don't set aside extra money.
7. The reimbursement (or fair market value of the dependent care expenses) are provided for the applicable year and may not exceed the least of the following limits:
a) $5000 ($2500 if you are married and do not file a joint tax return for the year)
b) Your taxable compensation (after any reductions under the 401(k) plan, dependent care assistance plan and medical/dental plans)
c) If you are married, your spouse’s actual deemed earned income.
For purposes of 7a) above, if two employees are married to each other and file a joint tax return, a single $5000 limit applies to both spouses together. For purposes of 7c) above, your spouse will be deemed to have earned income of $200 ($400 if you have 2 or more dependents described in paragraph 1) above) for each month in which your spouse is: Physically or mentally incapable of caring for him or herself or a full time student at an educational institution. For all purposes of paragraph 7) above, certain separated spouses are not treated as married.