Child and Dependent Care Tax Credit: What Is It + How Does It Work?

 

When it comes to tax credits and strategies, navigating the complex world of taxation can be a real puzzle. One tax credit that many confuse is the Child and Dependent Care Tax Credit. It's essential to distinguish it from the Child Tax Credit. 

In this guide, we'll delve into the Child and Dependent Care Credit, who is a qualifying dependent, eligible care expenses, and how to claim the tax credit. 

What is the Child and Dependent Care Credit?

The Child and Dependent Care Credit is a nonrefundable tax credit designed to provide working individuals with financial assistance for childcare or care expenses for dependents with disabilities. Its primary purpose is to ease the financial burden of working families who need help caring for their loved ones.

This credit is most beneficial if you anticipate owing on your taxes, as it will reduce your tax bill. However, if you expect a refund, it may do little for your tax strategy, as you won’t get an additional refund.

How Much is the Child and Dependent Care Credit Worth?

The Child and Dependent Care Credit is based on your adjusted gross income (AGI). The credit allows you to claim between 20% and 35% of up to $3,000 for one qualifying dependent or $6,000 for two or more qualifying dependents, with a maximum credit of $1,050 for one dependent or $2,100 for two or more.

The percentage you can claim decreases as your AGI increases. However, there is no upper limit on the credit, meaning even if you earn more than $43,000, you may still be able to claim up to 20% of your expenses.

Does My Child or Dependent Qualify?

The first qualifying factor is your child or dependent. You must claim them as a dependent on your taxes, and they must be one of the following at the time you paid for the care:

  • A child under 13 years old

  • Your spouse who is unable to take care of themselves and has lived in your home for at least half the year

  • Any dependent who is mentally or physically unable to care for themselves and has lived with you for more than half the year (e.g., a parent, grandparent, or adult child)

The IRS defines an individual as physically or mentally incapable of self-care if they cannot attend to their hygiene or nutritional needs or require full-time attention for their own safety or the safety of others. However, an individual will not qualify for the Child and Dependent Care Credit if:

  • They received $4,400 or more in gross income.

  • They filed a joint return.

  • You or your spouse could be claimed as a dependent on another taxpayer’s return.

What Care Expenses Qualify?

Qualifying expenses for the Child and Dependent Care Credit include various care options, such as daycare, in-home caretakers, nurses and aides for disabled dependents, day camps, nursery school, and more. However, some expenses, like overnight camps, child support payments, or expenses for kindergarten and higher grades, do not qualify.

It's important to note that specific individuals, including your spouse, the parent of the dependent (if under 13), another dependent you and your spouse claim, or your child below age 19, cannot be caregivers to qualify for the credit.

How Can I Claim the Child and Dependent Care Credit?

To be eligible for the Child and Dependent Care Credit, you or your spouse must have:

  • Earned income throughout the year (i.e., money earned through employment), and

  • Paid for the care to work or seek employment.

So, what if I’m married? You and your spouse must file jointly to claim the tax credit, OR you must show you meet special requirements listed on Form 2441.

What about separated or divorced couples? In this case, the custodial parent (i.e., the one who had the child for the most nights during the tax year) may claim the credit, even if the other parent claims the dependent(s) on their tax return. 

What about couples with joint custody? If both parents cared for the child or dependent an equal number of nights, the parent with the higher AGI is eligible for the credit.

You can claim the Child and Dependent Care Credit on your 2024 tax return by listing qualifying expenses from 2023. You must complete and attach Form 2441 and Schedule 3 to Form 1040, Form 1040-SR (for seniors), or Form 1040-NR (for non-resident aliens). The form contains instructions to calculate your credit amount. You’ll also need to provide the following: 

  • Social Security number, taxpayer identification number (TIN), or adoption identification number of the qualifying dependent

  • Names, addresses, and TINs of each individual or organization that cared for your dependent(s)

If you're looking for expert guidance in maximizing your tax benefits and minimizing your tax liability, contact JLS Accounting! We're here to help you navigate the complexities of the tax system and ensure you're taking full advantage of tax credits like the Child and Dependent Care Credit. Book an intro call today to learn more and get a head start on preparing your 2023 taxes.

 
Individual Taxes, TaxJaime Lynn Soares