By Louis DeNicola
Are you responsible for the well-being of a loved one? If you pay someone to take care of your child, spouse or a dependent adult, you could be eligible for the Child and Dependent Care Credit. This tax credit may help offset some of your expenses to the tune of up to $2,100.
Why is the Child and Dependent Care Credit valuable?
Tax credits are generally more valuable than tax deductions because credits decrease your tax burden on a dollar-to-dollar basis while deductions lower your taxable income.
Unlike some other tax credits, there's no maximum income limit for the Child and Dependent Care Credit.
Although its value decreases as your income rises, at a minimum it's worth 20 percent of your qualified expenses.
The Child and Dependent Care Credit is a nonrefundable tax credit, meaning it can offset how much you owe in taxes but won't lead to a refund if your tax liability is already zero.
Claiming the credit doesn't negate your ability to claim other credits if you otherwise qualify for them, including somewhat similar credits.
For example, you might also qualify for the Child Tax Credit if you have a child who's 16 or younger and the Earned Income Tax Credit if you're a low- to moderate-income earner with a qualified dependent.
How much is the credit worth?
Your credit's value will be 20 to 35 percent of your qualified expenses depending on your
adjusted gross income (AGI), which is your overall reported income minus certain adjustments.
The maximum amount of qualifying expenses you can have is $3,000 if you're caring for one qualified person, or $6,000 if you're caring for two or more.
The maximum value of the credit you could qualify for is:
- $1,050 (35 percent of $3,000) if you care for one qualifying individual.
- $2,100 (35 percent of $6,000) if you care for two or more qualifying individuals.
When determining your qualifying expenses, you may need to make subtractions or other adjustments for certain items such as employer-sponsored benefits that you’re excluding from your income or nontaxable reimbursements for expenses from state social services agencies.
If you're caring for two or more qualifying individuals, the $6,000 total limit applies no matter how the expenses are divided.
Crystal Stranger, an enrolled agent based in Las Cruces, New Mexico, and president of 1st Tax, reminds her clients to include a second qualified child if they have one, even if only a small amount of qualifying expenses were paid for the child.
How do you qualify for the Child and Dependent Care Credit?
There are several rules that determine whether you can claim the Child and Dependent Care Credit. Here’s a summary of a few of the key requirements:
"To claim this credit, both spouses must have earned income wages or be self-employed," says Joshua Zimmelman, president of Westwood Tax and Consulting in Rockville Centre, New York. However, an exception can apply if one spouse was a full-time student or incapable of taking care of him or herself.
The expenses you paid must be "work-related," meaning the money was spent on qualifying care to allow you and your spouse (if you have one and file jointly) to work or look for work.
You can only claim expenses that helped further your qualifying person’s well-being and protection.
The IRS has additional guidance on what types of expenses qualify as “work-related”, but they could include certain daycares, (non-overnight) summer camp, a babysitter and after-school program costs.
Your care provider, the person or organization you paid, can't be:
- Someone you can claim as a dependent.
- Your spouse.
- Your child if he or she is 18 or younger at the end of the year.
- A parent of your qualifying person.
You could, however, count qualifying expenses paid to parents or other relatives not on the list above — even if they live in your home.
The qualifying person who you're caring for must be:
- Your dependent child who lived with you for more than half the year and was under the age of 13 while receiving care, or
- A spouse who can't physically or mentally care for him or herself and lived with you for over half the year, or
- A person who can't physically or mentally care for him or herself, lived with you for over half the year, and was your dependent (or would’ve been your dependent if it weren't for certain specific circumstances).
Generally speaking, your filing status can't be "Married filing separately." Instead, you’re normally only eligible if it’s one of the following:
- Married filing jointly.
- Head of household.
- Qualifying widow(er) with a dependent child.
One exception would be if you're separated or living apart from your spouse (but not divorced or legally separated). If this is the case, you might be able file using the "Married filing separately" status and still claim the credit.
However, to still qualify, you'll generally need to have lived apart for the last six months of the year, your qualifying person must have lived in your home for six months and you must have paid for more than half of the upkeep costs of your home.
How do you claim the credit?
You can claim the Child and Dependent Care Credit if you meet all the requirements and file your federal tax return using Form 1040, 1040A or Form 1040NR — but not Form 1040EZ. You also have to complete and attach Form 2441, where you must list:
The amount you paid and each care provider's name, address, and SSN, ITIN or EIN.
Expenses incurred for the care of the dependent and his or her name and SSN, ITIN or ATIN.
Form 2441, or your tax-preparation software, can walk you through the process of determining how much the credit will be worth to you. You'll then enter the amount on line 49 of Form 1040, line 31 of Form 1040A or line 47 of Form 1040NR.
You can sign up and use Credit Karma Tax to help you prepare and file your taxes for free. It will walk you through the steps to help you determine if you’re eligible for the credit and complete this form.
What common mistakes do people make?
Considering all the rules that determine whether you can claim the credit and which expenses qualify, it's not surprising that mistakes sometimes happen.
"A common mistake can occur when taxpayers use a flexible spending plan (FSA) at work and then try and claim the Child and Dependent Care Credit," Zimmelman says. "This is an example of double dipping — one can’t take two breaks for the same expense."
The long list of qualifications could make you second guess your eligibility for the Child and Dependent Care Credit. However, Credit Karma Tax can help you determine whether you qualify and file your taxes for free.
Knowing what information you'll need to provide can help ensure you won't have any errors and that you'll receive as much credit as possible.
About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.
Disclaimer: We know taxes are complicated, so we provide this information for general educational purposes only. It isn’t intended to be personalized legal, financial or tax advice, and we don’t guarantee the accuracy, completeness or reliability of this content. If you have questions about your personal tax situation, consider contacting an accountant, tax attorney or financial advisor. Come back to Credit Karma Tax when you’re ready to file your taxes for free!