Child Tax Credit and Dependent Care: What It Is and Who Is Eligible

You may want to be aware of a tax deduction if you have paid for daycare, preschool, or another type of care.

The popular cousin of the child tax credit, the child and dependent care tax credit, is frequently confused with it. The child and dependent care tax credit, on the other hand, is unique in that it is intended to assist those who work or are seeking work with care-related expenses.

This is a description of the credit’s operation, who is eligible, and how to apply for it.

The Child and Dependent Care Credit (CDCC) Is What, Exactly?

A tax credit known as the child and dependent care credit, or CDCC, is available to parents and other caregivers to assist in paying for eligible care cost.

You must have generated revenue throughout the year and paid for the care costs. This is so that you could either work or look for employment if you want to claim the credit on your tax return.

Because the CDCC is nonrefundable, it is most advantageous for people who expect to owe taxes when they file. This implies that any taxes due will be reduced by the credit amount. But, taxpayers won’t get a refund for any excess.

What Is the Value of the Child and Dependent Care Tax Credit?

The child and the dependent tax credit is worth 20% to 35% of up to $3,000 (for a single qualifying dependant) or $6,000 for the 2022 tax year (for two or more qualifying dependents). Adjusted gross income determines the precise percentage of eligible expenses that can be written off.

Who Can Receive the CDCC as a Qualifying Dependent?

Generally speaking, the individual for whom you are paying care expenses must be reported as a dependant on your taxes and fall under one of the following categories:

A young person (13 years old).
A spouse who has lived with you for more than half the year and is physically or psychologically unable to care for themself.
A person you can list as a dependent on your tax return who has lived with you for more than half the year. And is also mentally or physically unable to care for themselves (a parent, for example).

Even though they fulfill all the above criteria, you may not be allowed to claim them as a dependent for the following reasons:

They made $4,400 or more of gross income.
They submitted one return jointly.
You or your spouse may be included as a dependent on someone else’s return if you are filing jointly.

Children who turn 13 during the tax year, newborns, and those who are separated or divorced all have particular regulations. For more information, look up IRS Publication 503.

Who Qualifies as a Care Provider?

When claiming the CDCC, the IRS is quite specific about what constitutes a “care provider.” Not just anybody is eligible. For instance, it is not acceptable to pay your spouse or other close relatives to take care of your dependant. Those who are regarded as domestic employees are subject to additional regulations.

The IRS will also ask you to give information about the care provider such as their name, address, and taxpayer identification number. When you submit your credit claim. A care provider’s TIN is their Social Security number if you engage them as an individual. For corporations, it’s their employer identification number or EIN.

Added Requirements for the Child and Dependent Care Credit

The complete scoop is in IRS Publication 503, but here are some more crucial things to remember:

In general, you must file married filing jointly to claim the credit as a married couple. However, if the couple is legally divorced, not cohabitating, or separated, the primary custodial parent may apply for the credit. Also, the party with the greater income is eligible to claim the credit if there is joint custody and the qualified dependent spends the same number of nights with each party during the year.
To be eligible, you must have earned money all year long. Pensions, income earned abroad, Social Security benefits, workers’ compensation, unemployment, investment income from interest or dividends, and child support payments. This is all excluded from the calculation.
If you file your taxes jointly with your spouse and they are a student (enrolled full-time for at least five months of the year), they will be considered to have earned income during that period. Volunteering is not acceptable.
If you worked only a portion of the year or only part-time, different rules for computing the credit application.

How to Obtain the Tax Credit for Dependent Children

Tax returns submitted in 2023 may claim the child and dependent care credit using eligible costs incurred in 2022. Form 2441 and Schedule 3 must be attached to the ordinary 1040 tax form.

The worksheet on IRS Form 2441 might assist you in calculating the precise credit amount you’re entitled to. The outcome is then entered on line 2 of Schedule 3. If this sounds like a lot of papers to keep track of, don’t be concerned. The good news is that the majority of high-quality tax preparation programs can automatically determine and submit the credit on your behalf.

Is It Worthwhile to Claim the Child and Dependent Care Tax Credit?

As the CDCC is nonrefundable, it may be important if you expect to owe taxes. The credit, however, serves little purpose if you anticipate receiving a refund.

In addition to the child and dependent tax credit, it could be beneficial to take additional options into account. For instance, flexible spending accounts for dependent care provided by your company let you transfer pre-tax money from your paycheck to an account for certain care costs. You may make up to $5,000 in contributions for the 2023 tax year.

You will reduce your taxable income by the comparable amount you contribute. This is because the contributions are tax-advantaged, which may result in greater tax savings than using the CDCC credit alone. Just keep in mind that you cannot “double-dip,” or claim the same expenses for both benefits, if you use the CDCC and the dependent care FSA. Contact Your Part Time Accountant for more help.