Updated December 15, 2020
If your family is among the many families that incur child care expenses so that a parent can attend school, you may be eligible for a child care tax credit. Generally, the child care credit is only available to couples where both parents work, but a special provision of the tax law permits married parents attending college to also get the credit, if they meet certain criteria, even if the student-parent has no income.
Normally, the child care credit is based on care expenses for children under the age of 13 (limited to $3,000 for one child and $6,000 for two or more) and further limited to the lesser of (1) the taxpayer’s earned income, (2) the spouse’s earned income, or (3) the actual child care expenses. If one of the spouses does not have an income, then no credit would be available, thus penalizing families where one parent is attending school full time with no earned income. To correct this inequity, the tax law includes a special provision for spouse-students.
To qualify for this tax break, the student-parent must be a full-time student for some part of five months during the year (the months don’t have to be consecutive). For each month the student-parent qualifies as a full-time student, their earned income is considered to be the greater of $250 ($500 if the care is for two or more children) or their actual earned income for that month. If the student-parent is a full-time student for the entire year, the artificial income would be $3,000 for one child and $6,000 for two or more, permitting the student-parent the maximum allowable child care credit. This phantom income is used only for computing the child care credit and doesn’t become income that is taxed.
The actual credit is based upon the taxpayer’s income (AGI). For incomes between zero and $43,000, the credit ranges from 35% to 21%. For incomes above $43,000, the credit is 20%. The credit will reduce both income tax and the alternative minimum tax, but it is not refundable.
For example, a couple has two children under the age of 13. One spouse works full time and earns $45,000 a year. The other spouse attended college full time for nine months during the year and was not employed. Their annual child care expenses for the two children are $5,000. The student-spouse’s artificial income (from the chart) is $4,500. The couple’s child care credit is computed based upon the artificial earned income $4,500, since it is less than the actual expenses of $5,000 and the expense limitation is $6,000 for two children. Assuming the couple met all the other care qualification criteria, their credit would be $900 (20% of $4,500).
This article focused on the special full-time student provisions of the child care credit. There are also special provisions that apply for the care of a disabled spouse.