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Finances play a factor in most of our decisions, especially when it comes to making choices about child care and early childhood education. One factor to keep in mind when it comes to these decisions is how these choices will affect your tax return. The Child and Dependent Care Credit is a tax break designed to “give back” some of the money you spend on caring for a child — or someone else in your household who cannot care for themselves — while you work. Here is a breakdown of how the credit works and what the requirements the IRS uses to qualify this care.
The first requirement you must meet to earn the Child and Dependent Care Credit is that you must have earned income, clarified as money earned from a job, and you must have paid for the care so that you could work or look for work. However, full-time students and parents unable to care for themselves also qualify, even if they don’t receive any income. Also, if you’re married, you must file jointly to receive this credit.
Fundamentally, you qualify for the Child and Dependent Care Credit if you paid for someone to care for someone who could qualify as a dependent in your household. But there are some nuances built into that. To understand the types of care that qualify, we must first breakdown two things: who qualifies to receive the care and who qualifies to give the care.
Those who qualify to receive this care are those claimed as a dependent on your tax filing or who can’t take care of him or herself. They also must have lived with you for at least half of the year by the end of the year. This includes your spouse or relative with physical or mental disabilities and children who are under the age of 13.
To understand who is qualified to give care under the Child and Dependent Care Credit, it’s easier to understand who isn’t qualified. The person giving care to your dependent cannot be: your spouse, anyone listed as a dependent on your tax return, your own child age 18 or younger, or a parent of the child being cared for (meaning, you can’t receive credit for paying your ex-husband to care for a child you have together). To claim this credit, you must provide the name, address, and social security number (or employer identification number) of the person providing the care. The IRS has made it clear that preschool, prekindergarten, and nursery school programs are all valid forms of child care deductions.
You’re probably familiar with deductions — common deductions people applied to tax filings include student loan interest and charitable donations. However, unlike a deduction, which reduces the amount of income that you have to pay taxes on, a credit directly reduces the amount of taxes you owe, dollar for dollar. Here’s an example. If you claim a $1,000 deduction, it might result in reducing your taxable income by $200, depending on which tax bracket you fall. However, a tax credit of $1,000 reduces the amount you pay in taxes by exactly that amount, $1,000.
If your caregiving arrangements meet all the above requirements, then the amount of money that will be credited toward your taxes will depend on how much you spend on that care. There is a cap on the total expenses you can claim each year: $3,000 for one person and $6,000 for two or more people. This tax credit is calculated by taking a percentage of your allowable expenses, however, that percentage is determined by your income level, with smaller percentages applied to higher incomes, resulting in a smaller credit. There is no upper limit on income for claiming this credit.
If you are a parent of a child but are not married to the child’s other parent, then there are some things to take into consideration before claiming the Child and Dependent Care Credit — and even before claiming your child as a dependent on your taxes. A child who qualifies for the credit can only be claimed on one tax return. A child who ends up being claimed as a dependent on tax returns filed by both divorced parents is subject to tiebreaker rules — a series of tax rules that help determine which parent gets to claim the child as a dependent.
Whether it’s helping with the rules surrounding child care, setting up your own in-home preschool, or finding a school for your child, Wonderschool has the resources to help.