There is frequently confusion around child care expenses when couples divorce. It’s important to understand what may be deductible and by whom.
If you spend money on child care to enable you to work, carry on a business, or to attend school, as opposed to hiring a babysitter for a night on the town, you may be able to get a tax deduction for the cost of child-care expenses. Under the tax rules, you can generally deduct money you paid to caregivers providing child-care services, day nursery schools and daycare centres, as well as fees for child-care services offered through educational institutions, day camps and day sports schools where the primary goal of the camp is to care for children.
The child-care expense deduction is currently limited to $8,000 annually for a child under the age of seven, $5,000 for other eligible children aged seven to 16, and $11,000 for a child who qualifies for the disability tax credit.
The child-care expenses incurred do not need to be paid for each eligible child. For example, If you have 3 kids, age 14, 11 and 5. The 2 older kids do not require any child care but the 5 year old requires daycare during the work day. You could still claim up to $18,000 of child-care expenses, based on the ages of your three kids and the respective limits (i.e. 2 X $5,000 + $8,000).
In cases of a primary care parenting arrangement, only the primary care parent can claim the child care expenses. The other parent then contributes to the net cost of the total expense, after adjusting for the tax benefits.
In a shared parenting arrangement, each parent is allowed to claim childcare expenses for the days the children live with them. There are two options. Each parent can directly pay the childcare provider for their share of the expense and the childcare provider will issue receipts to each parent to claim on their tax return (this is generally simplest). Alternatively, if only one parent is making the payments to the childcare provider and the receipt is issued in their name only, the parent receiving the receipt, may claim the expense, less the shared payment (reimbursement) from the other parent and must issue a receipt to the other parent for their contribution. The second parent will use the receipt from the first parent to claim the balance of the childcare expense.
It’s important to have and keep all your receipts to claim your child care expenses! Every receipt needs to be made out to the person who paid for the child care expenses. Receipts between the parents should be issued to be clear about who paid what amount.
This post is written by Eva Sachs, CFP, CDFA, CFDS