Finance Friday: (Tax Time p.1) Child and Dependent Care Tax Credits: Qualifications and How to Claim Them

Source: Renjith Krishnan,

It’s no secret that cost of dependent care can be very expensive. With a greater number of families requiring dual incomes to make ends meet, it has become increasingly necessary for many to rely on daycare for their children and – for some – their mentally or physically disabled adult dependents. Fortunately, there are tax credits available to alleviate the burden created by costly child and dependent care expenses. This tax credit can be worth between 20%-35% of dependent care expenses. The amount that you can claim as a credit is dependent upon your income level and your number of qualifying dependents.
So, do you qualify? Here’s how to find out if you are eligible and, if so, the steps you’ll need to take in order to claim the credit:

Who Qualifies as a Child or Dependent?

According to IRS tax rules, an individual who is incapable of caring for his or herself – either mentally or physically (or both) – and requires care on a full-time basis for his or her own safety, as well as the safety of others, will qualify as a dependent. The most common qualifying individuals are children under the age of 13. Spouses who are physically or mentally incapable of caring for themselves also qualifies as dependents.
To claim children or dependents for a tax credit, the children that you are claiming must live with you for more than half of the year and you must pay more than half of the expenses associated with maintaining the home for your dependent. Also, if your child or dependent does not live with you for the entire year and you are claiming the credit for part of the year, you may only claim expenses that you paid during the period of time in which the qualifying child or dependent lived with you.

Who Qualifies for the Child or Dependent Care Tax Credit?

In addition to having a qualifying child or dependent, you must also meet the following eligibility criteria in order to claim the tax credit:
•    If married, you are required to file a joint income tax return.
•    You must have earned income during the tax year for which you are claiming the credit. If you are filing a joint return, your spouse must have earned income as well.
•    The payments that you made for dependent care must have been made so that you can either work or look for work.
•    You are only able to claim a payment made to a care provider who is not claimed as a dependent or as your spouse. This means that you cannot pay one child to take care of another child or family member and then take a tax credit for that money.
•    You must include your child or dependent care provider’s information on your tax return. This includes their name, address, social security number or taxpayer identification number or employer identification number.

How Much is the Child or Dependent Care Tax Credit?

The tax credit is calculated as a percentage of the amount of money that you paid for child and dependent care expenses so that you could go to work or look for work. The percentage amount is based on your adjusted gross income (AGI), and is limited by how much income you earn, the year in which it was earned, and the number of individuals that you are claiming as qualified children or dependents for the tax credit. The maximum amount of this credit can be up to 35% of your expenses. If your employer provides reimbursement or payment toward any of your dependent care expenses, your tax credit will be reduced by that amount.
The maximum amount of expenses allowed to figure out the tax credit is $6,000 if you have two or more dependents and $3,000 if you have one dependent. So, for example, if your annual dependent care expenses for two dependents totaled $7,000 for the year, you will only be allowed to use the $6,000 amount to determine the amount of the tax credit. Once you calculate your dependent care expenses for the year – less any reimbursements paid by an employer – you must use the IRS tables (found on IRS Form 2441) based on your AGI to find out what percentage amount to multiply your dependent care expenses by in order to determine your tax credit amount. For example, if you have one qualifying dependent, did not receive any employer reimbursements, have qualifying expenses of $2,500, and have an AGI of $32,000, your maximum possible tax credit would be equal to $650 (26% x 2,500 = $650).

How to Claim the Child or Dependent Care Tax Credit

If you have a qualifying child or dependent and meet eligibility requirements for making the tax credit claim, you will need to complete IRS Form 2441, Child and Dependent Care Expenses, along with your Form 1040, Form 1040A or Form 1040NR, in order to claim the tax credit. You are not allowed to file IRS Form 1040EZ or Form 1040EZ-NR if taking the child and dependent care tax credit.

If you pay daycare expenses for children or disabled adult dependents, this federal tax credit may enable you to save you a great deal of money in taxes paid. Because there are many small factors on your tax return that can impact claiming this credit and the amount you can claim, it is generally a good idea to work with a qualified tax preparer if you believe that you may qualify for this credit.
This guest post was provided by Manny Davis. Manny’s website provides IRS tax help to taxpayers through detailed and easy-to-understand tax guides on various topics, including tax credits, tax deductions, tax garnishments and more.

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