Claiming the Child and Dependent Care Tax Credit

Tax Attorneys at Ainer & Fraker, LLP Discuss the Child and Dependent Care Tax Credit

The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent, or disabled spouse. Here are some facts you may need to know about this tax credit.

If you pay someone to care for one or more “qualifying individuals,” you may qualify for the Child and Dependent Care Credit. A qualifying individual includes your child under age 13. It also includes your spouse or a dependent who lived with you for more than half the year and was physically or mentally incapable of self-care.

The care must be provided so that you can work or look for work. If you are married and filing jointly, the care must be provided so that both of you can work or look for work. In addition, you must have both earned income (both must have earned income if married and filing jointly, but see the exception below), such as income from a job or profits from self-employment. An exception applies if a spouse is a student or is unable to care for him- or herself. In that case a monthly imputed amount is used for earned income. That amount is $250 for one qualifying person and $500 for two or more.

Example: Bob and Jerry, who are married and filing jointly, have two children under the age of 13. Jerry worked all year while Bob attended school all year finishing up his college education. For purposes of computing the credit, Bob would use $6,000 as his income.
The payments for care cannot go to your spouse, the parent of your qualifying person, or to someone you can claim as a dependent on your return. Payments also cannot go to your child who is under age 19, even if the child is not your dependent.

This credit is a percentage, ranging from 20% to 35%, of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals, you can claim up to $6,000 of your costs. Taxpayers with an AGI of $15,000 or less use the 35% credit rate, while those with an AGI over $43,000 use the 20% rate. The credit rate declines between AGIs of $15,000 and $43,000.

If your employer provides dependent care benefits, those benefits are pre-tax and will reduce the $3,000 and $6,000 cap on expenses for computing the credit. If you and your spouse have dependent care benefits at work and your employer contributes more than the $3,000 expense limit for one qualifying individual or $6,000 for two, then the amounts contributed in excess of the $3,000/$6,000 limits will be taxable on your return.

You must include the name, address, and Social Security number (individuals) or Employer Identification Number (businesses) of your care providers on your tax return.

Where the care is provided in your home, the caregiver will generally be considered your employee. Unless you are using a caregiver service that handles the employee’s payroll, you may need to pay unemployment tax, your share of the employee’s FICA, and file state payroll returns, depending on the amount you paid the caregiver(s). The IRS will usually check on this if auditing the credit. Of course, the payroll taxes you pay will count as childcare expenses.

The credit is a non-refundable credit that can be used to offset both your regular tax and your alternative minimum tax; but if the amount of the credit is greater than your tax, you cannot get a refund of the difference.

If you have questions related to how this credit applies to your specific situation, please Contact a Tax Attorney at Ainer & Fraker, LLP.

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