The Child and Dependent Care Credit reimburses the cost of child care for low- to moderate-income American families and can be claimed along with other tax deductions and tax credits.
Let’s take a closer look at how the dependent care tax credit works, what is considered a qualifying expense, and how to make the most of this valuable federal tax credit on your tax return.
The Child and Dependent Care Credit (CDCC) is a tax credit for eligible expenses involved in caring for qualified dependents. Parents and caregivers can claim this credit on their income tax return if they and their qualified dependents meet certain criteria.
To claim care expenses, a qualifying person or dependent must be under the age of 13 when the care is provided or be a spouse or individual who is physically or mentally incapable of caring for themselves. In addition, you (or your spouse if you file a joint tax return), must have care expenses while working or looking for work.
Read more: Tax Credits vs. Deductions: What’s the Difference?
The Child and Dependent Care Credit is a dollar-for-dollar nonrefundable credit. This means that if you have a tax bill, the qualifying expenses that determine your credit amount might reduce your tax liability to zero, but they won’t trigger a refund. If you don’t owe taxes, you can’t get a refund by claiming this tax credit on your federal tax return.
The Child and Dependent Care Credit is available to all tax filers regardless of earned income. However, your income determines the amount of credit you can receive, up to a maximum of $3,000 per qualifying child or individual, or $6,000 for two or more dependents.
The portion of the total expenses eligible for the claim usually falls between 20% and 35% for most taxpayers. Most low-income families qualify for some portion of the maximum loan rate percentage and will receive a significant tax break if they owe money to the IRS.
The Child and Dependent Care Credit helps families reduce their back taxes and eases child poverty, but there are rules about it. Follow this guide or use IRS.gov Child and Dependent Care Loan Tool To ensure you qualify before filing your tax return.
Step 1: Clarify your application status and adjusted gross income
Request a child from a child and care tax, yours application status You must be married at the same time as filing, or you must be the primary guardian for custody if you are divorced or separated. For divorced or separated parents with joint custody, The IRS says A parent with a higher income can request a loan.
Although this tax credit has no income limit, you must have earned income during the tax year to qualify. Investment income, Social Security and unemployment benefits, and retirement income do not qualify as earned income for this credit. Calculate your adjusted gross income (AGI) by adding all your taxable income and then subtracting the allowable adjustments. Once you know your AGI, you can determine what percentage of qualified expenses you’ll be eligible to claim.
For taxpayers who are married filing a joint return and one spouse is a full-time student, the spouse is treated as having earned income for each month they are enrolled full-time.
Read more: What is earned income tax and do you qualify?
If your application status and income mean you qualify for this credit, the next step is to see if the following criteria are appropriate for the dependents whose care expenses you are trying to claim.
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The person is claimed as a dependent on your tax return.
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If a child qualifies, they are under 13 years of age.
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If not under the age of 13, a dependent person is a spouse or other individual who is physically or mentally unable to care for themselves.
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They lived with you for more than half the year.
IRS Publication 503 Details of specific rules and exceptions for spouses who live apart or who provide financial support to the addict for a certain part of the year.
There are two components that define which expenses are eligible for care tax: the types of expenses and the care provider. Although the IRS has fairly generous rules about who qualifies as a caregiver, certain family members (like spouses or grandparents) and some household employees do not qualify as caregivers for this credit.
Some costs such as application fees or deposits may be excluded. And for divorced or separated parents, child support payments are not eligible.
The rules are also tricky for dependent care needs received through an employer’s care facility, so check IRS website For more information.
AND The IRS requires Records and receipts for eligible expenses you paid, as well as the taxpayer identification number or social security number of the person or organization that provided the care.
For those filing the CDCTC for an adult or spouse who cannot care for themselves, you may be asked to provide evidence of the nature, extent and duration of the disability.
Once you’ve double-checked eligibility and collected your records, you’ll use IRS Form 2441 Claim a tax credit on your tax return.
Note that for future tax years it may make sense to use the sponsoring employer Dependent Flexible Spending Account (DCFSA) where you can set aside up to $5,000 in pre-tax dollars to pay for childcare costs.
1. Is a tax refund on care tax on care?
The Child and Dependent Care Loan is not a refundable loan. That means he can reduce his tax bill, but he can’t get a refund.
The Child Tax Credit (CTC) is also a non-refundable tax credit aimed at helping low- and moderate-income families with the cost of raising a child. The Additional Child Tax Credit is a refundable part of the Child Tax Credit available to low-income families.
However, the CTC does not require proof of expenses and instead offers a flat credit amount per dependent child to account for everyday household expenses such as rent, food and more.
Although you can’t claim child and dependent expenses you paid with funds from a flexible spending account, you may still be able to use them in the same tax year.
For example, if you emptied your DCFSA on child care expenses earlier in the year, any additional care expenses you have may be eligible for the dependent care credit.
