The Child and Dependent Care Credit Explained
If you’ve had to pay for childcare or care for a relative who is disabled throughout the year, the expenses can add up. When you’re responsible for the care of a dependent, it can be hard to work because the costs of care are exponential. However, if you’re claiming a dependent on your taxes this year and you had to pay for care for him or her, you may qualify for a tax credit that can save you thousands in tax liability.
The child and dependent care credit gives you back a portion of the money you spent on child or dependent care dollar-for-dollar as a tax credit, which can help to reduce the taxes you owe. Before you assume you can claim every hour you paid for childcare, however, it’s important to review the eligibility guidelines of this tax credit.
Knowing when you cannot claim your childcare on your taxes is just as important as understanding when you do qualify for this tax credit. Learning the qualifications that determine whether someone is a dependent is also important before you assume a child or relative can be claimed as such on your tax return. Before you attempt to claim dependent eligibility taxes, review the guidelines for this specific tax credit and the qualifications for claiming a dependent.
How Much Is the Credit Worth?
The child and dependent care credit is a tax credit and not a tax refund or reduction. Therefore, the amount you qualify for is provided as a credit toward the taxes you owe. You cannot receive a refund for the amount left over after your tax liability zeros out because this credit is considered “non-refundable.” Unlike a reduction, this credit helps you with the taxes you owe dollar-for-dollar, based on what you qualify for. Therefore, if you qualify for a $1,000 credit through the child and dependent care credit, $1,000 is deducted from your tax balance.
Your income and how much you spent on care for your eligible dependent will determine how much childcare tax credit you qualify for. To calculate the tax credit you’re eligible for, you’ll need to first add up the eligible care expenses you incurred throughout the year. However, the Internal Revenue Service (IRS) sets a limit on childcare expenses you can claim at $3,000 for one person or $6,000 for more than one person.
To correctly calculate your potential tax credit for dependents, you’ll also need to deduct any childcare funds your employer provides or money they withhold from your pay before taxes. Next, compare the expenses you’re claiming to your earned income and the earned income of your spouse, if you’re married. The smallest of all these amounts is considered your “allowable expenses.”
The child and dependent care credit you qualify for is a percentage of your allowable expenses, which can range from 20% to 35%. The percentage of credit you qualify for is based on your income. While there is no income limit to qualify for this tax credit, the higher your income, the lower the percentage of credit you qualify for. The lower your income, the higher the percentage used to calculate your credit.
Who Qualifies for the Credit?
You can only claim the child and dependent care credit if you’re claiming a dependent on your taxes and he or she needed care at some point throughout the year. The IRS rules for qualifying dependents are extensive, but most of these basic rules cover almost anyone you consider to be dependent on you. There are two types of dependents you can claim on your taxes: your children, or relatives who rely on you for care and income.
Generally, if you paid for care for one of the following people, you can qualify to claim the tax credit:
- A child who is 12 or younger by the end of the year and who you claim as a dependent on your tax return.
- Your spouse, if he or she cannot take care of him or herself and has lived with you for over half the year.
- Any other person you claim as a dependent on your taxes who cannot take care of him or herself and who has lived with you for over half the year.
Additionally, for any one of these dependents to qualify, he or she must be a U.S. citizen and cannot be claimed on another person’s taxes as a dependent. An eligible dependent also cannot be married and filing taxes jointly with another person. To qualify someone as a dependent relative, you must provide at least half of the person’s income for the year.
Qualified Care Expenses
To claim the child and dependent care credit, the care provided to your dependent must also square with the IRS’s restrictions. You can only claim care that you or your spouse paid for so that you could work for earned income. The caregiver you paid cannot be one of the following:
- A parent of the child being cared for.
- Your spouse.
- Anyone else listed on your tax return as a “dependent.”
- Your child who is 18 or younger.
You can also claim the tax credit if a qualifying caregiver provided care to your eligible dependent while you were using your time to look for work.
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This post was updated November 11, 2019. It was originally published November 11, 2019.