Childcare is a challenge for a lot of parents around the country, especially when both parents work. Knowing how to take advantage of the tax provisions for child and dependent care can help at tax time.
The Child and Dependent Care Tax Credit (CDCTC) allows a credit for child and dependent care expenses, as long as they meet certain criteria:
- The care must be for one or more qualifying persons. A qualifying person is a dependent under the age of 13 when the care is provided. To be your dependent, a person must be a qualifying child (generally, a child who lives with you for more than half the year) or your qualifying relative.
- You (and your spouse) must have earned income during the year. If you don’t have earned income because you don’t work or because you claim a loss from self-employment, you cannot claim the credit. Earned income generally includes income from self-employment, wages, salaries, tips, and other taxable employee compensation. It does not include pension and annuities, social security, workers compensation or unemployment benefits, or other income not related to work. Child support payments are not considered childcare and do not qualify for the credit.
- You must make payments for childcare expenses so that you and your spouse (if filing jointly) can work or look for work. If you are married and one spouse does not work and is not looking for work, you cannot claim the credit.
- Expenses you pay for daycare, nursery school, preschool, or other programs for children below the level of kindergarten qualify for the credit, as do before or after school programs for children under the age of thirteen. The care can be provided in your home or at a school or center. Tuition for private K-12 education does not qualify for the credit.
- If you file Married Filing Separately, you cannot claim the credit.
- You must be able to identify the qualifying dependent by name and social security number (or Adoption taxpayer ID number) on the return, as well as identify the care provider by name, address, and tax ID number.
The credit is calculated by multiplying the childcare expenses by a percentage from 35% to 20%, based on your Adjusted Gross Income. The childcare credit is not a refundable credit, meaning it cannot reduce your tax liability below zero.
If your employer offers dependent care benefits, you can benefit from the tax code in two ways. First, you are able to set aside up to $5,000, pre-tax, from your salary to pay for child care expenses. If your child care expenses exceed the $5,000 cap, you can take the remaining expenses for the CDCTC.
By Janet Berry-Johnson, CPA