The child and dependent care credit is explained

The Child and Dependent Care Credit offsets child care expenses for low- to moderate-income American families and can be claimed along with other top-of-the-line tax deductions and tax credits.

Let’s take a closer look at how the Dependent Care Tax Credit works, what counts as qualified expenses, and how you can use this important federal tax benefit on your tax return.

The Child and Dependent Care Credit (CDCC) is a tax credit for qualified expenses for caring for eligible dependents. Parents and caregivers They and their dependents can claim this credit on their federal income tax return if they meet certain criteria.

To claim care expenses, the competent person or dependents must be under 13 years of age at the time the care is provided, or the spouse must be physically or mentally incapable of self-care. In addition, you (or your spouse if you’re filing a joint tax return) must pay care expenses while you’re working or looking for work.

Read more: Tax Credits and Deductions: What’s the Difference?

The child and dependent care credit is a nonrefundable, dollar-for-dollar credit. This means that if you have a tax bill, the eligible expenses that determine your credit amount can reduce your tax liability to zero, but not a refund. If you don’t owe taxes, you can’t get a refund by claiming this tax benefit on your federal tax return.

The Child and Dependent Care Credit is available to all taxpayers, regardless of earned income. However, your income determines the amount of credit you can receive, up to a maximum of $3,000 for one eligible dependent child or individual, or $6,000 for two or more dependents.

The portion of the total expenses that are eligible to claim often falls short 20% to 35% For most taxpayers. Most low-income families qualify for a portion of the maximum credit rate percentage and receive significant tax relief if they owe money to the IRS.

The Child and Dependent Care Credit helps families lower their taxes and alleviate child poverty, but there are rules for claiming. Follow this guide or use it IRS.gov Child and Dependent Care Loan Tool To make sure you’re eligible before you file your tax return.

Step 1: Explain your application status and adjusted gross income

To claim the Child and Dependent Care Tax Credit, your filing status must be married filing jointly, or you must be the primary caregiver if you are divorced or separated. Joint custody for divorced or separated parents The IRS says A parent with a higher income can apply for a loan.

While 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 pension income do not qualify as earned income for this credit. Calculate your adjusted gross income (AGI). By adding all taxable income and subtracting allowable adjustments. Once you know your AGI, you can determine the percentage of qualifying expenses that you are eligible to claim.

For taxpayers filing a joint return and one spouse is a full-time student, that spouse is considered to have earned income each month they are enrolled full-time.

Read more: What is the Earned Income Tax Credit and are you eligible?

If your filing status and income mean you’re eligible for this credit, the next step is to see if the dependents’ care expenses you’re trying to claim match.

• The person will be asked if they are a dependent on your tax return.

• In the case of an eligible child, they are under 13 years of age.

• If not under 13 years of age, the dependent is a spouse or other individual who is physically or mentally unable to care for themselves.

• They have lived with you for more than half of the year.

IRS Publication 503 It details special rules and exceptions for couples who live apart or provide financial support to dependents for part of the year.

There are two categories of expenses that qualify for the Child and Dependent Care Tax Credit: the types of expenses and the care provider. Although the IRS has rules on who qualifies as a caregiver, certain family members (such as your spouse or grandparent) and certain household employees are not eligible for this credit as caregivers.

Certain costs, such as application fees or deposits, may be waived. And for divorced or separated parents, child support payments are not eligible expenses.

The rules are also tricky for dependent care benefits you receive through an employer-sponsored care facility, so be advised of this. IRS website For more information.

of The IRS asks Records and receipts for eligible expenses you paid, as well as the taxpayer identification number or Social Security number of the person or organization who provided the care.

For adult dependents or spouses who are unable to care for themselves who submit to the CDC, they may be asked to provide proof of the nature, extent, and duration of their disability.

Once you’ve double-checked your eligibility and gathered your records, you’ll apply IRS Form 2441 To claim a tax credit on your tax return.

Remember that it may be beneficial to use an employer sponsor for future tax years Dependent Care Flexible Spending Account (DFSA) Where you can set aside up to $5,000 in pre-tax dollars to pay for childcare expenses.

1. Is the child and dependent care tax credit refundable?

The child and dependent care credit is not a refundable credit. This means it can reduce your tax bill but not generate a refund.

The Child Tax Credit (CTC) is also a non-refundable tax credit aimed at helping low- and moderate-income families with the costs of raising a child. The Additional Child Tax Credit is a part of the Child Tax Credit available to low-income families.

However, the CTC does not require proof of expenses and instead provides a flat credit amount to the dependent child for household expenses such as rent, food, etc.

While you can’t claim the child and dependent care credit for expenses you paid with money from a variable spending account, you can use both in the same tax year.

For example, if you empty your DCFSA of child care expenses at the beginning of the year, any additional care expenses you incur may qualify for the dependent care credit.