Guide to the Child and Dependent Care Credit
If you pay care expenses for a dependent child or adult in your household, you may be eligible for the child and dependent care credit.
In the following guide, we cover everything you need to know about the child and dependent care credit (CDCC), including what it is, who and what expenses qualify, how much the credit is worth, and how to claim it. Keep reading to learn more.
What Is the Child and Dependent Care Credit?
The Child and Dependent Care Credit (CDCC) is a tax credit for parents or caregivers designed to help alleviate the financial burden of paying for the care of a qualified dependent, child or adult.
It is not to be confused with the Child Tax Credit (CTC), which is a federal tax credit available to taxpayers with dependent children under the age of 17. The CDCC exists to benefit caregivers who work or are looking for work and who also pay care expenses.
Who Qualifies as a Taxpayer for the Child and Dependent Care Credit?
In order to claim the Child and Dependent Care Credit, you (and your spouse if filing jointly) must have earned income throughout the year.
The IRS defines earned income as “wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment.” Earned income also includes “strike benefits and any disability pay you report as wages.”
Here’s what is not considered earned income:
- Amounts excluded as foreign earned income on Form 2555
- Pensions and annuities
- Social security and railroad retirement benefits
- Workers’ compensation
- Interest and dividends
- Unemployment compensation
- Scholarships or fellowship grants, except for those reported on Form W-2 and paid to you for teaching or other services
- Nontaxable workfare payments
- Child support payments received
- Income of a nonresident alien that isn’t effectively connected with a U.S. trade or business
- Any amount received for work while an inmate in a penal institution
The bottom line is you (and your spouse if filing jointly) must have earned income for the year. Now let’s identify who qualifies as a dependent for the credit.
Who Qualifies as a Dependent for the Child and Dependent Care Credit?
According to the IRS, in order to qualify as a dependent for the Child and Dependent Care Credit, a person must be:
- Your child who is your dependent and who was under the age of 13 when the care was provided
- Your spouse who wasn’t physically or mentally able to care for himself or herself and lived with you for more than half the year
- A person who wasn’t physically or mentally able to care for himself or herself, lived with you for more than half the year, and either:
- was your dependent, or
- would have been your dependent except that
- He or she received gross income of $4,400 or more,
- He or she filed a joint return, or
- You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s tax return
Additional qualifications and rules apply for special circumstances, such as in the case of newborns, children who turn 13 during the tax year, and people who are divorced or separated. Refer to IRS Publication 503 for the latest information regarding qualifying persons, expenses, and more. Now that we have defined who qualifies as a taxpayer and as a dependent for the Child and Dependent Care Credit, let’s take a look at what expenses are eligible.
What Expenses Qualify for the Child and Dependent Care Credit?
Here are some examples of care-related costs that qualify for the Child and Dependent Care Credit:
- Childcare through a childcare center, daycare, preschool, early learning center, or other out-of-home care facilities
- Care provided by a nanny, neighbor, or relative (except a spouse, dependent, or child of the taxpayer under the age of 19)
- Before- and after-school care
- Day camp
- Transportation that a care provider takes with the qualifying dependent, such as bus, taxi, or subway
- Application/registration fees and deposits
Care-related costs that do not qualify for the credit include:
- Payments of child support
- Costs for kindergarten and above grades
- Summer school
- Sleepaway camps
- Food, lodging, clothing, education, or entertainment, unless these costs are nominal and part of a childcare program
If you and your dependent qualify, and if your care expenses are eligible, then you will want to know how much the credit is worth.
How Much Is the Child and Dependent Care Credit Worth?
How much of the CDCC you may take depends on your adjusted gross income, which determines the percentage of qualifying expenses you can deduct. As a standard, the credit is worth 20% to 35% of up to $3,000 for one qualifying dependent or 20% to 35% of up to $6,000 for two or more qualifying dependents.
|Amount of Qualified
|1||Up to $3,000||Less than $15,000||35%||$1,050|
|More than $43,000||20%||$600|
|2||Up to $6,000||Less than $15,000||35%||$2,100|
|More than $43,000||20%||$1,200|
For high earners, the current maximum credit is $600 for one qualified dependent and $1,200 for two or more qualified dependents. As an alternative, if your employer offers a dependent care flexible spending account (FSA) to pay for childcare with pre-tax dollars, you may be able to achieve greater tax savings than the amount of child and dependent care credit you get. The best option for your situation will depend on the number of your qualified dependents, the total cost of eligible expenses, and your income tax bracket.
How to Claim the Child and Dependent Care Credit
If you have determined you and your dependent(s) are qualified to receive the CDCC, you must submit Form 2441, Child and Dependent Care Expenses, when you file your federal income taxes. You will need to give the care provider’s name, address, and identifying number (either their social security number or taxpayer identification number). You will also need to provide your qualified dependent’s name, social security number, and the qualified expenses related to their care. The second part of the form helps you calculate the correct amount of your credit.
In summary, if you pay for care related to a qualified dependent, child or adult, in your household as you work or look for work, you may be eligible to receive a child and dependent care credit.
Honest Buck offers professional tax and accounting services for Early Childhood Education businesses. For more information about tax credits and deductions, including the child and dependent care credit, reach out to speak with one of our experts. Contact us today!
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