What is the Child and Dependent Care Tax Credit & How Much It Could Save You?

Whether you’re paying for preschools, summer day camps, after-school programs, or daycare, child care expenses can take up a large slice of your income. The good news is, that the IRS enables you to offset some of these expenses through the Child and Dependent Care Tax Credit. Let’s see what it is and how it can help you save up on your childcare expenses as well as tax bill.

When it comes to reducing your tax bill, understanding tax deductions is important. The Child and Dependent Care Tax Credit is one such federal tax benefit that’s designed to provide financial relief to families who pay for the care of a child or dependent while they work, look for work, or attend school. This credit can be applied to a wide range of care expenses, including daycare centers, in-home care, and summer day camps for children under the age of 13.

This credit helps in efficient tax planning and helps you reduce the amount of taxes you owe. Eligible taxpayers can claim this credit when they file their year-end returns. The CDCTC can be claimed by both married and single taxpayers.

Who Qualifies for the Credit?

You qualify for the Child and Dependent Care Tax Credit, if you provide:

• care for a child under the age of 13 whom you claim as a dependent;

• a dependent who is physically or mentally incapable of self-care and who lives with you for more than half of the year;

• Be a working parent or spouse (in case filing jointly); and

• childcare expenses to allow you to work or seek employment.

What is the Eligibility Criteria?

• You (or your spouse if filing jointly) have paid for the care expenses so that you could work or look for work. Being a full-time student or a parent unable to care for themselves does count as “working”.

• You (and your spouse, if you’re married) must have “earned income,” meaning money earned from a job. Non-work income, such as investment profits, doesn’t count.

• The child or the Dependent you cared for must have an SSN (Social Security Number) or ITIN (Individual Taxpayer Identification Number) or ATIN (Adoption Taxpayer Identification Number);

• You (or your spouse if filing a joint return) have lived in the United States for more than half of the year. However, special rules apply to military personnel stationed outside of the United States.

How Much is the Child and Dependent Care Tax Credit Worth?

The amount of tax credit you can claim varies based on your income and the number of dependents in your care. Here’s a breakdown of how much the credit is worth:

How is the Credit Calculated?

The amount of the Child and Dependent Care Tax Credit is based on a percentage of the qualifying care expenses. The percentage varies depending on the taxpayer’s income but generally, it is calculated as:

• Add up the total amount of your care expenses that qualify for the credit.

• If your employer gives you money to pay childcare expenses, or if you have money withheld from your pay on a pre-tax basis, subtract this money from your allowable expenses.

• Compare your claimed expenses with your earned income and, if you’re married, your spouse’s earned income. Take the smallest of all these amounts. These are your “Allowable expenses.” Your credit is a percentage of your Allowable expenses. However, there’s no upper-income limit that would prevent you from claiming the Child and Dependent Care Credit.

• Credit Percentage: The credit can cover up to 35% of qualifying expenses for lower-income families. This percentage decreases as income rises, with the minimum credit rate being 20%.

• Maximum Expenses: For the 2023 tax year, the maximum eligible expenses are $3,000 for one qualifying person and $6,000 for two or more qualifying dependents. This means that even with multiple children, a significant portion of care expenses can be offset by the credit.

What Expenses Qualify?

The credit can be applied to a variety of work-related care expenses, including:

• Day Care Expenses: Fees paid to licensed daycare centers for the care of children under 13.

• In-Home Care Expenses: Wages paid to babysitters, nannies, or other in-home care providers.

• Summer Day Camps: Costs associated with summer day camps. This can be a significant expense for working parents during the school break.

• Transportation costs: Travelling expenses that are necessary for your dependent’s care.

• Household services: Expenses that partly contribute to the well-being of a qualifying dependent. For example, housekeeping, babysitting, and cooking.

However, it’s important to note that overnight camps do not qualify for this credit, as they are considered non-work-related expenses. Similarly, care expenses during leisure do not qualify for this credit. For example, the salary paid to a babysitter to watch your kids while you go out for dinner does not qualify for child and dependent care tax credit. That’s because this babysitting fee didn’t help you to work.

Is the Child and Dependent Care Tax Credit Deductible?

No, the Child and Dependent Care Tax Credit is not deductible. Instead, it is a tax credit and directly reduces the amount of tax you owe, dollar for dollar. Unlike a deduction, which only reduces your taxable income, a tax credit is applied to your actual tax liability, making it more valuable in reducing your overall tax bill. This means if the credit is more than your tax liability, you cannot receive a refund for the difference.

For example, if you owe $2,000 in taxes and qualify for a $1,000 Child and Dependent Care Tax Credit, your tax bill would be reduced to $1,000. This credit can provide significant relief for eligible taxpayers, especially those who have substantial child or dependent care expenses.

How to Claim the Credit?

Claiming the Child and Dependent Care Tax Credit requires some extra paperwork. You need to complete Form 2441 and submit it with your Form 1040. However, claiming this tax credit may affect your ability to claim other tax credits and vice versa. That’s why it is important to consult a Tax Expert before filing to check on the other alternatives and benefits available. Professional tax consultants can help you maximize your credits while staying compliant with all tax regulations.

Need help navigating the complexities of tax credits?

At Knowvisory Global, we can help you understand your eligibility requirements and guide you on ways to maximize credit and minimize IRS tax penalties. We handle all your paperwork, so you can focus on what matters most!

Contact us today and make the most of your tax benefits. We can help you stay sorted and prepared for the upcoming tax season.