How to Calculate the Child Care Tax Credit

If you paid someone outside your family to care for one or more of your children while you worked, or looked for work, you can reduce your income taxes by a portion of the amount you paid by claiming the child care tax credit. Before starting the calculation, though, be aware that you can only claim the credit if you have earned income--that is, income from work.

Factors

• To calculate the child tax credit, you'll need to know a few numbers. First is how much you spent on child care for the year. However, the IRS limits the claimable amount to $3,000 for one child and $6,000 for two or more. If you paid for care of two or more kids, the amount you spent does not have to be divided equally between them. So if you spent $3,500 on care for one child and $1,500 on care for another, you can still claim $5,000 worth of child care expenses.

  Next thing you need to know is your earned income for the year; if you're married, you also need to know the separate amount of your spouse's earned income. This is the amount you made in wages, salaries, tips or self-employment income. It does not include interest or other non-work income.

  Finally, you need to know your household's adjusted gross income, or AGI, for the year. This is your total income, from all sources, minus some common deductions. You determine your AGI by filling out the first page of your tax return.

Baseline

• Start the calculation by comparing your earned income, your spouse's earned income and the total amount you spent on child care. Whichever number is the smallest will be the "baseline" figure for the calculation. So if you had $40,000 in earned income, your spouse had $4,000 in earned income and your family had the full $6,000 worth of claimable child care expenses, the baseline would be $4,000. But if your spouse had $8,000 in earned income, then the baseline would be $6,000--because that's now the smallest of the three figures.

Calculation

• Find your adjusted gross income on your tax return. The percentage of the baseline figure that you can claim is based on your AGI. The percentages are listed under "Amount of Credit" in IRS Publication 503 (see Resources). For the 2009 tax year, for example, an AGI of less than $15,000 meant you could claim a credit for 35 percent of your baseline, and an AGI of $43,000 or more meant you could claim only 20 percent. An AGI in between those figures got you a credit of 21 percent to 34 percent of your baseline.

Adjustment

• If your adjusted gross income is above a certain amount, the IRS requires you to reduce the amount of your tax credit. As of 2009, the threshold was $100,000. For every $1,000 over that amount, the credit shrank by 10 percent. Taxpayers with an AGI over $109,000 could not claim the credit at all.

Identification

• IRS Form 2441 guides you through the process of calculating the child care tax credit. You must fill out and file this form to claim the credit. Note that you will need to identify the person or business you paid to provide child care, including the provider's Social Security number or Employer Identification Number.