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It's easy to confuse the child and dependent care tax credit with its popular cousin, the child tax credit. However, the child and dependent care tax break is distinctive in that it is designed to help people who work or are looking for work with expenses related to care.
Here's a breakdown of how the credit works, who qualifies and how to claim it.
What is the child and dependent care tax credit?
The child and dependent care credit, or CDCC, is a tax credit for parents or caregivers to help cover the cost of qualified care expenses, such as day care, for a child under 13, a spouse or parent unable to care for themselves or another dependent.
If you plan to claim the credit on your tax return, you must have earned income throughout the year and paid for the care expenses so that you could either work or seek employment.
The CDCC is most beneficial for those who anticipate owing taxes when they file because the credit is nonrefundable. This means that any taxes owed will be decreased by the credit amount, but taxpayers will not receive any overage in the form of a refund.
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How much is the child and dependent care credit worth?
The child and dependent care credit is worth 20% to 35% of up to $3,000 (for one qualifying dependent) or $6,000 (for two or more qualifying dependents). This means that for the 2022 tax year, the maximum child and dependent care credit is $1,050 for one dependent or $2,100 for two or more dependents.
How much of the credit you're eligible for depends on your adjusted gross income, which determines the percentage of qualifying expenses you can deduct
Here's a glance at how it breaks down by percent and income level. Note that there is no income restriction on the CDCC — if you make more than $43,000, you may still qualify to claim up to 20% of expenses.
Who is a qualifying dependent for the child and dependent care credit?
Generally, to qualify for the credit, the person for whom you're paying care expenses must be claimed on your taxes as a dependent and be either:
A child under the age of 13.
A spouse who is mentally or physically unable to care for themselves and has lived with you for more than half of the year.
A person who is mentally or physically unable to care for themselves, who has lived with you for more than half the year and whom you can claim on your return as a dependent (a parent, for example).
You may also be able to claim someone who meets all the previous requirements, but you could not claim as a dependent because:
They made $4,400 or more of gross income.
They filed a joint return.
You or your spouse (if filing jointly) could be claimed as a dependent on someone else's return.
There are special rules for children who turn 13 during the tax year, newborns and people who are separated or divorced. See IRS Publication 503 for more information.
What care expenses qualify toward the child and dependent care credit?
Before claiming the credit, you must ensure the care expenses you paid throughout the year qualify or are approved by the IRS.
Preschool or equivalent care programs for children below kindergarten.
Pre- and after-school care.
A care provider who watches your dependent outside your home (e.g., a neighbor).
Transportation that a care provider takes with your qualifying dependent (e.g., bus, subway, taxi).
Dependent care center.
Fees, certain deposits and application fees paid to care providers or care services.
What doesn't qualify:
Child support payments.
Expenses to attend kindergarten and above grades.
Food, lodging, clothing, education or entertainment (unless these costs are small, incidental and part of a care service program).
Also, if your employer contributes to your care expenses, you have a dependent care flexible spending account or if you take advantage of an employer-sponsored care facility, you may need to subtract the amount contributed for those benefits from your total qualifying expenses. To see a complete list of qualifying expenses and applicable rules and stipulations, see IRS Publication 503.
Who counts as a qualified care provider?
The IRS is very particular about how it defines "care provider" to claim the CDCC. Not just anyone qualifies. For example, paying certain family members, such as your spouse, to take care of your dependent is not permissible. There are also additional rules for people who are considered household employees.
Other people who may be ineligible to provide paid care include:
The parent of the child/dependent (if your qualifying person is your child and under age 13).
Another dependent you or your spouse can claim on your tax return.
Your child under the age of 19.
When you claim the credit, the IRS will also ask you to list information about the care provider, including their name, address and taxpayer identification number. If you hire an individual as a care provider, their TIN is their Social Security number; for businesses, it's the employee identification number or EIN.
Additional child and dependent care credit requirements
IRS Publication 503 has the full scoop, but here are some other significant details to keep in mind:
Generally, to claim the credit as a married couple, you must file married filing jointly. However, the primary custodial parent may claim the credit if the couple is legally separated, not living together or divorced. In addition, if there is joint custody and the qualifying dependent is with each party for an equal number of nights throughout the year, the party with the higher income can claim the credit.
You must have earned income throughout the year to qualify. Any money earned from pensions, foreign earned income, Social Security benefits, workers' comp, unemployment, investment income from interest or dividends or child support does not count. See Publication 503 for a full breakdown.
If you are married filing jointly, and your spouse is a student (enrolled full-time for at least five months of the year), they will be treated as having earned income for the time they are enrolled. Volunteer work does not qualify.
Special rules for calculating the credit apply if you worked for part of the year or part-time.
How to claim the child and dependent tax credit
The child and dependent care credit can be claimed on tax returns filed in 2023 using qualifying expenses from 2022. You'll need to attach two forms to the standard 1040: Form 2441 and Schedule 3.
IRS Form 2441 has a worksheet that can help you determine the exact credit amount you're eligible for. You'll then enter the result on line 2 of Schedule 3. Don't worry if this sounds like a lot of paperwork to keep track of. The good news is that most good tax preparation software can automatically calculate and file the credit on your behalf.
Generally, you can only claim expenses you incurred during the tax year, but if you need to claim expenses from 2021 that you paid for in 2022, you may be able to increase the amount of your credit. Use Worksheet A of Form 2441 to calculate your credit amount and note the amount on line 9b of Form 2441.
When claiming the credit, you must include your qualifying dependent's Social Security number, individual taxpayer identification number or adoption identification number.
Bottom line: Is it worth claiming the child and dependent care tax credit?
It depends on your situation. The CDCC is nonrefundable, so it can make a difference if you anticipate a tax bill. However, if you foresee a refund, the credit may provide a limited benefit.
It may be worthwhile to consider other options in addition to the child and dependent tax credit. For example, employer-sponsored dependent care flexible spending accounts allow you to divert pre-tax money from your salary to an account for qualified care expenses. For the 2023 tax year, you can contribute up to $5,000.
Since the contributions are tax-advantaged, you'll lower your taxable income by the corresponding amount you contribute, which can mean more tax savings than taking the CDCC credit alone. Just be mindful that if you take advantage of the dependent care FSA and the CDCC, you can't "double-dip," or claim the same expenses for both benefits.
» MORE: 20 popular tax deductions and tax breaks to know about.