Basics of the Child & Dependent Care Credit

Are you paying someone to watch your child(ren) while you work? 

Then, thanks to the child and dependent care credit, you may be eligible to have a portion of those expenses refunded. This tax credit may also apply even if you are actively searching for work.

But before you start planning what you’re going to do with all that extra money, let’s take a closer look at how this tax credit actually works. 

What is the Child & Dependent Care Credit?

The child and dependent care credit allows you to recoup a portion of child care expenses while you worked or searched for work. This tax credit can be applied for up to 35% of qualifying expenses depending on your income.

However, it’s important to note: A tax credit is different from a tax deduction. 

A tax credit reduces the amount you owe for taxes by a specific dollar amount. In some cases, if the tax credit is more than you owe, then you receive the money back as a tax refund. A $2,000 tax credit means that you are receiving a reduction of $2,000 on your tax bill.

A tax deduction, on the other hand, reduces the amount you could claim as earned income. So a $2,000 tax deduction does not mean you are getting $2,000 back on your tax bill. It means you can claim to earn $2,000 less than you actually earn. Depending on your tax bracket, this may only be a tax savings of $300 to $450.    

As you can see, a tax credit can dramatically reduce your tax burden. That being said, most tax credits have strict rules and qualifications. You must be sure that you meet these qualifications in order to proceed. Falsely claiming tax credits may result in expensive tax penalties or even a much-dreaded audit.

Do I Qualify for the Child & Dependent Care Credit?

According to the IRS, if you want to claim the child and dependent care credit, you need to meet the following requirements:

• If married, you and your spouse file as married filing jointly.
• You pay for childcare or other qualifying services so you can work or look for work.
• You (and your spouse) have earned income. If one spouse is a full-time student or disabled at least five months out of the year, the IRS assigns a specific amount of earned income to that spouse.  
• You and the child/dependent live in the same house for more than half the year.

Who Qualifies as a Dependent?

Just like you, your child or dependent needs to meet certain criteria. 

For a child, the requirements include:

• If married filing jointly, the child needs to be under the age of 13.
• The child has to live in the household for more than half of the year.

A dependent can fall under different categories including:

• A spouse that isn’t able to physically or mentally care for him/herself.
• An individual without the ability to care for him/herself that has lived in your household for at least half a year.
• An individual with disabilities that would qualify as your dependent, but they received a gross income of $4,200 or more.

Families dealing with divorce or separation can also claim the child and dependent care credit, but the rules become a little more complex. It is best to consult with your tax advisor if you are seeking this credit and not filing under the married, filing jointly status. 

What Expenses Can Be Included in the Child and Dependent Care Credit?

Qualifying child and dependent care expenses must be work-related. This means the costs directly related to providing care for your dependent as you (and your spouse) go to work. Expenses can include paying for a babysitter, nanny, or child care center. 

If your dependent is cared for in the home, certain expenses like cooking, light housework, and lodging may also qualify. In addition, the gross wages of the caregiver plus your portion of social security, medicare, and other taxes are included.   

For in-home care, however, the caregiver CANNOT be:

• A person you claim as a dependent
• Siblings of the dependent under the age of 19
• A previous spouse or the parent of your child

If you are out of a job, but actively looking for work, dependent care expenses also qualify. That being said, if you have no earned income for the entire year, you are not eligible for this credit.   

What Expenses Aren’t Included in the Child & Dependent Care Credit?

Before you start tallying up your dependent care expenses, you need to know what won’t qualify. 

One of the biggest expenses that don’t qualify is what you pay for education starting at the kindergarten level. Before and after-school programs, on the other hand, may be considered eligible expenses. 

Other non-qualifying expenses include:

• Transportation to and from caregiving facilities
• Using a caregiver when you volunteer or go out for the evening
• Costs for an overnight camp

Information You Need to Provide to Obtain the Credit

You need to identify each person and/or organization that provides care for your child or dependent. This includes the caregiver’s:

• Name
• Address
• Social security or individual taxpayer identification number
• Employer identification number (EIN) for caregiving organizations

This information may be obtained by using the Form W-10 to request information, a social security card, a completed Form W-4, or an invoice from the provider. 

Determining Your Tax Credit

For the child and dependent care credit, you can claim up to $3,000 of expenses for one qualifying dependent. For two or more dependents, the number doubles to $6,000.

You and your spouse must earn more than what you claim for the credit. For example, if your spouse works part-time and earns $2,500 for the year, then you can only claim $2,500 of child care expenses.

The amount of tax credit depends on your adjusted gross income (AGI). Those earning less than $15,000 (AGI) can claim 35% of eligible expenses for the credit. This percentage decreases as AGI rises, but will not be less than 20%.

Alternatives to the Child & Dependent Care Credit

Your employer may provide opportunities to pay for child care expenses pre-tax. If you pay well over $3,000 for child care, talk to your employer’s human resources department. A pre-tax flexible spending account (or something similar) may save you much more once tax time rolls around. 

Confused About Tax Credits and Deductions?

Tax codes are complicated. You have enough going on in your life. The do-it-yourself approach may be great for painting a bedroom or changing windshield wipers. Sometimes, however, relying on trained professionals can save you a bunch of time, hassle, and money.

Steven Lissner & Company has a team of professionals that takes the headaches out of tax season. Our team gets to know you and your situation. We dig deeper than the “simple” tax return applications to ensure you’re going to receive every credit and deduction you deserve.

Get leverage over the IRS. Contact Steven Lissner & Company today.