Child and Dependent Care Tax Credit Boosts Family Income

Childcare expenses can add up quickly, and for many working people can comprise a significant percentage of their income. For this reason, to ease the financial burden of those who must contend with these costs, the federal government instituted the child and dependent care tax credit. This credit helps offset the expenses of childcare or dependent care by reducing a parent’s or caregiver’s tax burden by hundreds or even thousands of dollars.

Unlike a tax deduction, which reduces the amount of income upon which taxes are owed, a tax credit reduces taxes that are owed dollar for dollar, and does so regardless of income level. (Many tax breaks come with specified income ceilings which render ineligible those who are more financially well-off.) Though the child and dependent care credit does decrease as income increases, it is never negated entirely for even the wealthiest of individuals.

To qualify for the child and dependent care credit, an individual must be able to document care expenses for one or more of the following people:

  • A child you claim as a dependent on your tax return who is 12 or younger at the end of the year.
  • A spouse who is incapable of caring for himself/herself and who resides with you for at least half the year.
  • Any person you claim as a dependent who is incapable of caring for himself/herself and who resides with you for at least half the year.

There are certain care conditions, however, to which the credit does not apply. Even if you’ve compensated the following people for care, you will not be able to claim the credit:

  • Your spouse
  • A parent of the child receiving care
  • Anyone else you claim as a dependent on your tax return
  • A child of yours who is 18 or older, regardless of whether you claim them on your tax return

Additionally, to claim the credit, you (and your spouse, if you’re married) must file a joint tax return and provide the name, address and Social Security Number (SSN) or Taxpayer Identification Number (TIN) of the person you compensated for care. You must also be able to document “earned income,” which refers to money that has been earned through some form of compensated work rather than income from investments, an inheritance, or other non-job-related sources.

Further, the care must have been obtained and compensated for the purpose of you being able to work or to actively search for work, though for IRS’ purposes a parent or a caregiver who is a full-time student— even if they’re not receiving any income— is regarded as “working” and may therefore eligible for the credit.

When it comes time to file your taxes and claim your credit, our software will help walk you through the steps to figure out the amount of your tax credit. Our goal is to try and make what might initially feel like a complicated process simple and error-free.