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Tax Credits: Child and Dependent Care Credit

If you have a child or other dependent and work outside the home, you may need to pay someone to care for your loved ones. Fortunately, the child and dependent care credit may provide some financial relief. The child and dependent care credit is an income tax credit for up to 35 percent of certain expenses you paid to provide care for your dependent child, your disabled spouse, or a disabled dependent while you worked or looked for work.

To be eligible for this credit, you must provide care for a qualifying person, possess earned income, and incur work-related expenses.

A tax credit represents a dollar-for-dollar reduction of your income tax liability. A deduction, in contrast, only reduces your taxable income.

Can you take the child and dependent care credit?

There are several tests that determine if you may take the credit; you must meet all of them.

The care must be for one or more qualifying persons who are identified on the form you use to claim the credit

A qualifying person is:

  • Your qualifying child who is your dependent for whom you can claim an exemption and who was under age 13 when the care was provided (to be your qualifying child, a child must live with you for more than half the year and meet other requirements),
  • Your spouse who was physically or mentally unable to care for himself or herself and lived with you for more than half the year, or
  • A person who was physically or mentally unable to care for himself or herself, who lived with you for more than half the year, and either was your dependent relative for whom you can claim an exemption or would have been your dependent except that he or she had (1) gross income equal to or in excess of the personal exemption amount ($4,050 in 2016; $4,000 in 2015), or (2) he or she filed a joint return, or (3) you, or your spouse if filing jointly, could be claimed as a dependent on someone else’s tax return.

Special rules apply in the case of divorced or separated parents. Only the custodial parent may claim the child and dependent care credit, regardless of whether the noncustodial parent may claim the dependency exemption. The custodial parent is defined as the parent with whom the child shares the same principal residence for the greater portion of the calendar year. For more information, see IRS Publication 501.

You (and your spouse if you’re married) must have earned income during the year

Earned income includes:

  • Wages
  • Salaries
  • Tips
  • Other employee compensation
  • Net earnings from self-employment
  • Strike benefits
  • Any disability pay you report as wages
  • Parsonage allowances
  • Meals and lodging furnished for the convenience of your employer
  • Voluntary salary deferrals
  • Military basic quarters and subsistence allowances and in-kind quarters and subsistence
  • Military pay earned in a combat zone

Earned income doesn’t include:

  • Pensions or annuities
  • Social Security payments
  • Workers’ compensation
  • Interest
  • Dividends
  • Unemployment compensation
  • Scholarship or fellowship grants except amounts paid to you for teaching, research, or other services

Your child and dependent care expenses must be work-related

Expenses are considered to be work-related only if both of the following are true: (1) they allow you (and your spouse if you’re married) to work or look for work, and (2) they’re for a qualifying person’s care. If you’re married, both you and your spouse generally must work or look for work. Your spouse is treated as working during any month he or she is a full-time student or is physically or mentally unable to care for himself or herself. Your work can be for others or in your own business or partnership. It can be either full-time or part-time.

Work also includes actively looking for work. However, if you don’t find a job and have no earned income for the year, you can’t take this credit. That’s because the credit can’t exceed your earned income.

Whether the expenses you incur are necessary to allow you to work or look for work depends on the facts. In general, dependent care expenses for a period in which you are absent from work are not employment-related. However, if your absence from work is short and temporary (e.g., you have a minor illness or take a brief vacation) and you pay dependent care expenses on a weekly or longer basis, the expenses you pay for child and dependent care during this time will be considered work-related.

If you work part-time, you generally must figure your expenses for each day. However, if you are required to pay for dependent care expenses on a weekly or longer basis, you will not be required to allocate expenses between days worked and days not worked.

To qualify as work-related, your expenses must be incurred to provide care for a qualifying person. Such expenses are considered to be for the care of a qualifying person if the main reason they are incurred is to assure that person’s well-being and protection. Here are some examples of expenses that may qualify as work-related, assuming specific requirements are met:

  • Expenses you incur for some household services (such as the cost of a housekeeper, maid, or cook)
  • Fees paid to obtain care (including application fees, agency fees, and deposits) when and if care is actually provided
  • The cost of preschool, nursery school, or other similar programs below kindergarten
  • Expenses for before-school and after-school care programs
  • Expenses for day camps (even for camps that specialize in certain activities)
  • The amount you pay to a dependent care provider to transport your child to and from care, even if that cost is billed separately from other care expenses

Payments for services provided outside your home are qualified only if they are incurred for the care of a dependent under age 13, or for any other qualifying individual who regularly spends at least eight hours each day in your home.

Here are some examples of expenses that generally do not qualify as work-related:

  • Amounts you pay for food, clothing, and entertainment, unless these are small amounts paid that are incidental to and cannot be separated from the cost of caring for the qualifying person
  • Expenses to attend kindergarten or a higher grade (these are considered primarily educational, not work-related, expenses)
  • The cost of sending your child to an overnight camp
  • The cost of transporting your child between home or school and a dependent care location (e.g., by bus, car, taxi, or subway), unless the dependent care provider is furnishing the transportation

You must make payments for child and dependent care to someone you (or your spouse) can’t claim as a dependent

If you make payments to a relative, he or she cannot be your dependent and must be age 19 or older by the end of the year. Payments to your spouse or to the parent of your qualifying child who is not your spouse also do not qualify.

Your filing status must be single, head of household, qualifying widow(er) with dependent child, or married filing jointly

Generally, married couples must file a joint return to take the credit. However, if you’re legally separated or living apart from your spouse, you may be able to file a separate return and still take it.

If your spouse died during the year and you don’t remarry before the end of the year, you generally must file a joint return to take the credit. If you do remarry before the end of the year, the credit can be claimed on your deceased spouse’s federal income tax return.

You must identify the care provider on your tax return

You must supply the provider’s name, address, and taxpayer identification number. You must also indicate the amount you paid to the provider. You don’t have to show the taxpayer identification number if the care provider is one of certain tax-exempt organizations, such as a church or a school. If you can’t provide all of the information, or if the information is incorrect, you must be able to show that you used due diligence in trying to furnish the necessary information.

How do you figure the child and dependent care credit?

You must file Form 2441 with your tax return to claim the credit. The amount of your work-related child and dependent care expenses is first subject to an earned income limit and a dollar limit. The amount of your credit is then determined by multiplying your allowable expenses by a percentage factor based on your adjusted gross income (AGI).

Earned income limit

The amount of work-related expenses you use to figure your credit cannot be more than (1) your earned income for the year, if you are single at the end of the year, or (2) the smaller of your or your spouse’s earned income for the year, if you’re married at the end of the year. (Use your spouse’s earned income for the entire year, even if you were married for only part of the year.)

Jack remarried on December 3. His earned income for the year was $18,000. Jack’s new spouse’s earned income for the year was $2,000. He paid work-related expenses of $3,000 for the care of his five-year-old child and qualified to claim the credit. The amount of expenses Jack uses to figure his credit cannot be more than $2,000 (the smaller of his earned income or that of his spouse).

Dollar limit

There’s a dollar limit on the amount of your work-related expenses you can use to figure the credit. This limit is $3,000 for one qualifying person or $6,000 for two or more qualifying persons. If you paid work-related expenses for the care of two or more qualifying persons, the $6,000 limit doesn’t need to be divided equally among them. If you received dependent care benefits from your employer that you exclude from your income, you must subtract that amount from the dollar limit that applies to you. The dollar limit is a yearly limit, the amount of which remains the same no matter how long you have a qualifying person in your household.

In July, Jim enrolls his four-year-old son, Joey, in a preschool program to permit his spouse to begin a new job. Tim pays $300 per month for the preschool. He can count the full $1,800 he paid ($300 x 6 months) as qualified expenses since that amount is less than the yearly $3,000 limit.

Work-related expenses

Your credit is a percentage–ranging from 20 percent to 35 percent–of the allowable work-related expenses you paid by December 31. This percentage is based on your AGI (see Form 2441).

You can count prepaid expenses only in the year the care is received.

To determine the amount of your credit, multiply your work-related expenses (after applying the earned income and dollar limits) by the percentage determined by your AGI:

To determine your child and dependent care credit

AGI over:

But not over:

Applicable percentage:

$0

$15,000

35%

$15,000

$17,000

34%

$17,000

$19,000

33%

$19,000

$21,000

32%

$21,000

$23,000

31%

$23,000

$25,000

30%

$25,000

$27,000

29%

$27,000

$29,000

28%

$29,000

$31,000

27%

$31,000

$33,000

26%

$33,000

$35,000

25%

$35,000

$37,000

24%

$37,000

$39,000

23%

$39,000

$41,000

22%

$41,000

$43,000

21%

$43,000

No limit

20%

Jack had an AGI of $20,000 and allowable work-related child-care expenses of $2,000. He may qualify for a child and dependent care credit of $640 (32% x $2,000).

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