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3 Things You Need to Know to Get the Child Care Tax Credit

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Children (2-5) relaxing in classroom
Yellowdog Productions/Flickr
Child-care expenses can be a huge part of a family's budget, especially for single parents or in households where both parents work. But the Internal Revenue Service helps millions of Americans by offering a credit to offset some of your child-care expenses in order to help you work.

Here are three things you need to know to claim the Child and Dependent Care Credit on your tax return.

How to Qualify for the Child and Dependent Care Credit

The rules are structured to make the credit available only in situations where the care is needed in order to help the claiming parent or parents work or look for work. For joint filers, both parents must have earned income from wages, salaries or other compensation, including self-employment. Full-time students are also treated as having earned income for purposes of claiming the credit.

Moreover, the care must be directly connected to allowing you to work, rather than off-hours babysitting for personal reasons. This requirement leads to some important distinctions, with one example being that the cost of summer day camps qualifies for the credit, but overnight camps don't.

In most cases, children must be age 12 or younger to qualify for the credit. Certain exceptions exist for other individuals who aren't able to care for themselves.

The credit also has a number of technical rules. For instance, in cases involving divorce, the custodial parent can take the credit, while noncustodial parents can't, even if they would otherwise qualify to treat the child as a dependent.

How Much the Credit Can Pay You

The amount of the credit depends on two things: the number of qualifying children you have and your gross income. Those with one qualifying child can claim up to $3,000 per year toward determining the credit amount, while those with two or more qualifying children have a $6,000 annual limit.

Calculating the credit requires taking your actual expenses or the maximum limit, whichever is less. For those with incomes of $15,000 or less, the credit is 35 percent of the child-care expenses, which comes out to a maximum of $1,050 for those with one qualifying child or $2,100 for those with two or more qualifying children. Above $15,000, the credit drops by 1 percentage point for every $2,000 of extra income, hitting a minimum of 20 percent for those who earn $43,000 or more in adjusted gross income.

In addition, if you get partial reimbursement of expenses from a state agency or other source, then you're not entitled to take the credit on the reimbursed amount. Instead, you have to deduct the reimbursement and calculate the credit based on the net amount that you paid.

What Documentation You Should Get to Claim the Credit

In order to claim the credit, you need to fill out IRS Form 2441. On the form, you'll need to provide the name, address and Social Security number or Employer Identification Number of the provider. By doing so, the IRS can match your claim against the records that some child-care organizations are required to provide. It can also check to make sure that whoever you pay to provide child-care services reports those payments as income and pays taxes.

There's one exception for having to provide an Employer Identification Number. If a tax-exempt organization provides the care for your child, then you only need to write in "tax-exempt" in the box on Form 2441 that asks for an EIN.

For details, check out Publication 503 at the IRS website.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

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