Understanding the Child and Dependent Care Tax Credit

Is the cost of child or dependent care taking a big chunk out of your employment income? If so, you’ll want to read what the California Society of CPAs has to say about how the child and dependent care tax credit can help ease the financial burden.

What is it?

The child and dependent care credit benefits parents and caregivers who, in order to work or look for work, pay someone to provide care for a child under age 13 whom you may claim as a dependent or for a spouse or dependent of any age who is physically or mentally incapable of self-care. Most types of care qualify for the credit, including care provided at your home or the home of the caregiver, or at a child day care center, nursery school, or day camp.

Who qualifies?

To qualify for the dependent care tax credit, you—and your spouse if you are married—must be employed full or part time or be seeking work. The only exception applies when one spouse is either a full-time student or is physically or mentally incapable of self-care. You must have paid more than half the cost of maintaining the home in which you and the child or dependent live. The payments for care cannot be made to your spouse or someone you can claim as a dependent on your tax return or to your child who is under age 19.

How much?

The child and dependent care tax credit is a percentage, based on your adjusted gross income (AGI), of the amount of work-related childcare expenses you paid during the year. When calculating the dependent care tax credit, you may use up to $3,000 of dependent care expenses if you have one qualifying dependent and up to $6,000 if you have two or more dependents.

The credit can range from 20 percent to 35 percent of qualifying expenses paid during the year, with the exact percentage based on your adjusted gross income (AGI). The AGI amount at which the credit percentage begins to decrease is $15,000. Generally, the higher your dependent care expenses and the lower your income, the higher the tax credit.

Which tax forms?

You may take the dependent care credit even if you don’t itemize your deductions, but you cannot claim the dependent care credit if you are married filing separately. To claim the credit, you must file Form 1040 or Form 1040A. Taxpayers who file Form 1040 must complete and attach Form 2441. Form 1040A filers must complete Schedule 2. You cannot use Form 1040EZ to claim the dependent care credit.

On your tax form, you must include the name and Social Security number of your childcare provider or the taxpayer identification number of the childcare center. Keep in mind that if you pay someone to come to your home to provide the care, you may be a household employer, which could require you to pay employment taxes.

What about the fine print?

Expenses reimbursed through an employer-sponsored dependent care flexible spending account cannot be claimed for the child and dependent care credit. For example, if you or your spouse use a flexible spending account at work to pay for $4,000 of the $6,000 you pay to care for your two children, you can only count the non-reimbursed amount of $2,000 toward the dependent care tax credit.

The childcare credit is not refundable. This means that the tax credit may reduce your regular tax liability to zero, but not below zero, where a refund would result.

More help?

CPAs say that tax credits are a great way to save on taxes because they reduce your tax bill dollar for dollar. That means a $1,000 tax credit reduces your taxes by the full $1,000, as opposed to a $1,000 tax deduction, which in the 30 percent tax bracket, would save you $300. If you need additional advice, contact a CPA.