Strategy: Pay for the education with Uncle Sam’s help. So long as certain requirements are met, you can qualify for the dependent care credit (commonly called the “child care credit”).
Here’s the whole story: The dependent care credit is available for the cost of caring for qualified children under age 13. This includes costs incurred for baby sitters and day care centers. It may also include services paid for a household worker such as a nanny or a housekeeper.
The credit percentage depends on your AGI. It is 35% for taxpayers with an AGI of $15,000 or less. The percentage is gradually reduced until it reaches 20% for a couple with an AGI of $43,000or more. The credit can be claimed for the first $3,000 of expenses incurred for caring for one child; $6,000 for two or more children. However, the expenses eligible for the credit are limited to the taxable income of the lower-earning spouse, if that comes to less.
Key point: Both spouses must be “gainfully employed” (assuming the credit is being claimed by a married couple filing jointly) to qualify. But the tax law defines this term liberally. If one spouse works and the other one works part time or goes to school full time, both spouses are considered gainfully employed. For each month the spouse attends school, he or she is treated as having earned $250 for one child; $500 for two or more children.
Tip: A spouse is considered a full-time student only if he or she attends school in five months out of the year, but the months don’t have to be consecutive.
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