The child and dependent care credit is a tax benefit designed to help people who both work a job and pay for the care of either children or dependents, if not both. This tax credit aims to cover a portion of the expenses that working individuals have to cover in order to provide care for their children and dependents. It is a means of returning some of what is spent on care, which has the potential to save someone hundreds or thousands of dollars come tax season.
Qualified expenses under the child and dependent care credit
Expenses that qualify for this credit include things such as day care, babysitters, after-school programs and summer day camps. (Overnight camps are generally not eligible.) If your child has special needs, you might also be able to claim additional expenses such as tutoring, therapy or specialized equipment.
Major tax benefits of the child and dependent care credit
Tax deductions lower your total taxable income, but unlike deductions, tax credits can directly decrease the amount of taxes you are responsible for paying. In other words, instead of reducing the income that your taxes are based on, tax credits lessen the amount of money you have to send the IRS after filing your taxes.
How much will the child tax credit be in the coming year?
This tax credit will be equivalent to $2,000 per child as long as each eligible child qualifies. There is a potential for approximately $1,700 to be refundable.
How to claim children for the child and dependent care credit
In order to claim children in an effort to benefit from the child and dependent care credit, your child must be classified as a dependent in the eyes of the IRS. This child has to have lived with you for at least six of the 12 months in the relevant tax year.
And the child in question must be a dependent whom you paid the living expenses for in the past year as well. Last but not least, it is a requirement that the child have a Social Security number of their own, meaning they are either a citizen, a national resident or an official resident of the United States. The child must be under age 13.
How to claim dependents for the child and dependent care credit
Dependents don’t necessarily have to be your children. There are instances where people whose dependents include spouses or other individuals who meet the IRS’ requirements for eligibility as a dependent.
You are entitled to claim this tax credit for money you paid for care that went toward an eligible dependent. However, this is only possible if the person whom you paid care for was not your spouse, or the parent of the child being cared for, or someone who is denoted as a dependent on your tax return or any children of your own.
If you are married to your partner and trying to claim the child and dependent care credit, your money must be from income you earned by working a job. This means income from nonwork-related sources such as investment profits does not count. Also, if you and your partner are married, you have to file a joint tax return together.
How much can you, in particular, expect to receive through this tax break?
The amount of money you’ll receive in the form of the child and dependent care credit will be based on how much of your own money you spent on care for children, dependents or both. Your income will also be taken into consideration.
Essentially, you will need to calculate the total amount of care expenses you have paid. Subtract that value from the amount of allowable expenses you are permitted. Make sure you include any stipends that your employer grants you to put toward child care expenses or any money that is withheld from your pretax income for the same purpose.
From there, compare the value you intend to claim with the amount of money you earned. Do the same with your partner’s financial situation if the two of you are married. The lowest of these values will be considered your allowable expenses and the credit value will be a percentage of those allowable expenses.