Designed for working parents and caregivers with expenses connected to dependent care, the Child and Dependent Care Credit is a refundable tax credit that could help many parents and taxpayers responsible for the care of a disabled parent or spouse.
What Is the Child and Dependent Care Credit?
The Child and Dependent Care Credit isn’t the same as the child tax credit for parents and guardians of minor children. This credit was created to provide relief for those incurring dependent care costs while working or seeking employment. The credit is designed to compensate qualified taxpayers on a sliding scale based on their AGI. This credit is not a deduction; it’s a credit that lowers your tax bill. A deduction reduces taxable income, which is a big difference. If you were eligible for a $4000 tax credit, your tax bill would be decreased by $4,000, but if you qualified for a $4000 deduction at a 22% income tax rate, you’d only reduce your tax liability by $800. The American Rescue Plan was passed in 2021 to relieve taxpayers affected by the coronavirus pandemic. The goal of the tax relief bill was to provide qualifying filers with the opportunity to claim a greater portion of their work-related expenses. Because the credit was written as a refundable tax credit, lower income filers can receive the credit back as a refund if the credit exceeds their tax liability. The IRS has not stated if the credit will be refundable in tax year 2022.
Qualifying for the Child and Dependent Care Credit
Taxpayers who are paying someone to care for their children or qualifying dependent while they work or seek employment may be eligible for a child and dependent care credit regardless of their income. For tax year 2021, the maximum eligible expense for this credit is $8,000 for one child and $16,000 for two or more.
Before filing for the credit, the taxpayer should ensure they qualify. The IRS defines, for the purposes of this credit, a qualifying person as:
- A taxpayer's dependent is under age 13 when the care is provided.
- A taxpayer's spouse who is physically or mentally unable to care for themselves and lived with the taxpayer for more than half the year.
- Someone who is physically or mentally unable to take care of themselves and lived with the taxpayer for six months and either:
- The qualifying person was the taxpayer's dependent or
- They would have been the taxpayer's dependent except for one of the following:
- The qualifying person received gross income of $4,300 or more
- The qualifying person filed a joint return
- The taxpayer or spouse, if filing jointly, could be claimed as a dependent on someone else's return
- Taxpayers can use the Interactive Tax Assistant on IRS.gov to determine if they can claim this credit.
The previous year's tax return filed in 2022 will include the Child and Dependent Care Credit, which covers half (or 50%) of qualified childcare expenses. Credit for qualifying expenses maxes out at $8,000 for one dependent, and the maximum benefit claim is $16,000 for two or more dependents. Deducting half, or 50% of those qualifying expenses depends on the taxpayer's income.
How to File for the Child and Dependent Care Credit
To claim the Child and Dependent Care Credit, you must complete tax form 2441, Child and Dependent Care Expenses worksheet. You will file this page with your federal tax return. Ensure you review the form closely.
You will need to include the following information:
- Your care provider’s tax ID,
- Your dependent’s social security number
- Your income
- Your total qualifying expenses
Childcare is a huge expense for most working parents. Applying a portion of those expenses towards qualifying for a federal tax credit to lower your tax bill could free up much needed money in your budget. Qualifying for the Child and Dependent Care Tax Credit is easy, but it does have limitations. Not every taxpayer will meet the income requirements. The credit begins to phase out depending on the tax filer's adjusted gross income (AGI). Phase out begins for income earners with an AGI of $125,000, and it is eliminated for those with an AGI above $438,000. The credit can be applied to returns from a prior year, but the tax credit decreases to 20-35% of qualified dependent care expenses. It’s easy to make a tax error that leads to serious consequences. The biggest mistake taxpayers make is ignoring IRS issues. If your tax problems have grown out of control, contact Brandon Gardner & Associates, PLC, to schedule a consultation. You can reach us online or by calling our office at (616) 303-7444.Interactive Tax Assistant on IRS.gov to determine if they can claim this credit.