Child and Dependent Care Credit

Child and Dependent Care Credit is an essential tool to help working families raise their children and continue working or looking for employment. It is a tax break that helps you pay for the care you need to work or look for work. You can use it to cover expenses like daycare, care at your home or your caregiver’s home, babysitting, nursery schools, vacation day camps, and even summer camps. The credit is a percentage of the qualifying work-related childcare expenses you pay during the year based on your adjusted gross income. It can range from 20% to 35% of your total expenses and can be claimed up to $3,000 for one dependent or up to $6,000 for two or more. 

Unlike the popular child tax credit, which can lower your taxes based on how many kids you have, the CDCC is more specific and is available to a wider range of people. The credit can be claimed by single taxpayers and married couples filing jointly. It’s not refundable and only applies to expenses not reimbursed by an employer-sponsored dependent care flexible spending account. 

However, there are some exceptions to this rule. For example, if you are a noncustodial parent and your child is treated as your qualifying individual under the rules in Publication 503, Child of Divorced or Separated Parents or Parents Living Apart, you can claim the credit for up to 50% of your child’s expenses. For more information on child and dependent care credit eligibility, read IRS Publication 503, Child and Dependent Care Expenses. 

How to Claim Child and Dependent Care Credit?

To claim the credit, you must have a qualified dependent, as defined in Section 21 of the Internal Revenue Code (IRC). Qualified dependents include:

• Infants and toddlers.
• Children who are mentally or physically disabled and cannot care for themselves.
• A spouse who is physically or mentally incapacitated.
• Elderly or disabled people who lived with you for more than half of the calendar year.

Child and Dependent Care Credit is actually simple to claim. You just need to complete one extra tax form, Form 2441: Child and Dependent Care Expenses, and attach it to your federal or state income tax return. The form includes a worksheet that lists the percentage of qualifying expenses you must use to calculate the credit. The percentage starts at 15 percent for those with an AGI below $15,000. You can also use this worksheet to compare the amount of the credit you would get from a tax-advantaged dependent care flexible spending account and the child and dependent care credit.

You should use a dependent care flexible spending account (FSA) to get the most out of this credit. FSAs allow you to set aside pre-tax money to pay for eligible childcare and dependent care costs, which can lower your taxable income.