At a glance, dependent care credit is the credit for the overall costs of care for qualified individuals that allow the taxpayers to work or go out and look for jobs. The limit is the amount of the over-all expenses that the taxpayer can spare, which is $3,000 per qualifying individual and $6,000 for more than one qualifying individual. The credit amount is within the range of 20 to 35% of the expenses allowed. Percentage use depends on the total amount of the taxpayer’s adjusted gross income.
Taxpayers could claim the dependent care credit if they paid the expenses for the care of this qualifying child. They cannot take this if their filing status is married but filing separately. The expenses paid for the over-all care of the qualifying taxpayer are also eligible expenses if the intention of paying these expenses is to make sure that the child of the taxpayer is well taken care of and protected. If taxpayers receive the dependent care benefits, then the taxpayer receives a deduction from his or her income as well as a decrease of benefits that apply.
Qualifying Individuals for the Dependency Care Credit are the following:
- The dependent qualifying child is below the age of 13 or 13 years old when the Dependency Care was filed.
- The spouse of the taxpayer doing the filing is mentally or physically incapable of self-care and has also lived with the taxpayer for more than six months.
- The taxpayer is mentally or physically incapable of self-care and has lived in the residence that is filed in the form for more than six months. The taxpayer also has a gross income that equates or even exceeds the amount for exemptions and has filed a joint return that could have been claimed by the qualifying child as a declaration of the latter being the dependent.
- Qualifying children are also individuals who are mentally or physically unable to take care of themselves. If the person cannot take care of himself or herself due to mental or physical defect, cannot care for his or her nutritional needs and hygiene, then the full-time attention of another person is required to ensure the safety and protection of the said individual.
- Qualifying children are also the child or children of parents who are separated or divorced parents living apart. Noncustodial taxpayers who are parents of the child and is claiming the latter as their dependent should read ‘Child of divorced or separated parents or parents living apart’ which is filed in Publication 503 which is Child and Dependent Care Expenses. This is because the child is regarded as the qualifying individual of the taxpayer who serves as the custodial parent of the former and the dependent care credit is claimed by the noncustodial parent as well.
Note that if an individual qualifies for a mere portion of the income tax year, the expenses that have been paid for by the taxpayer during that time is the only amount included when calculating the credit. It is also important to provide the Taxpayer Identification Number or the TIN along with the Social Security Number or SSN of each that qualifies for Dependency Care.
Care of a Qualifying Individual
The care is provided inside or outside the household. Note that this does not include amounts that are not for the individual’s well-being. Taxpayers divide the total expenses between the amount that is allotted for the primary care of the individual getting the dependency care and the amount that is not solely for care purposes. This is then deducted from the primary expenses of the care costs of the individual with a number of the dependency care benefits from the employer of the taxpayer that can also be excluded from the total gross income. In other words, taxpayers can be excluded up to the amount of $5,000 for the dependent care benefits that they receive. Also, the expenses that are claimed by the individuals should not go beyond the smaller earned income of the taxpayer or his or her spouse. Special rules apply if the spouse of the taxpayer is incapable of taking care of himself or herself or is a full-time student.
Taxpayers must also identify all individuals or the specific organizations that will provide dependency care for the qualifying child or the dependent. They must report the information such as name, TIN, SSN, address of the care provider on the form. If the care provider is an organization that is tax-exempt, the taxpayer needs only one report containing the information of this organization. They can use Form W-10 which is the ‘Dependent Care Provider’s Identification and Certification’ and request the information from the care provider as well. If this information cannot be provided, the taxpayer can still be eligible for the dependency credit once they show that they exercise the due diligence to provide the information required. If the taxpayers pay providers to care for the spouse or the dependent in their homes, then they can be the household employer. Taxpayers who are household employers withhold and also pay the Medicare taxes and social security also pay federal unemployment tax.
As for payments to dependents or relatives, the provider of the dependency care cannot be the spouse, child below the age of 19, parent of the qualified individual or dependent that the taxpayer or the spouse claim as the dependent of their exemption.
When reporting on tax returns, the taxpayer must qualify for the appropriate credit as well as complete Form 2441 which is the Child and Dependent Care Expenses along with Form 1040A and Form 1040 which is the US Individual Income Tax Return. If they are non-resident aliens, they should get the 1040NR which is the Nonresident Alien Income Tax Return. If the taxpayer receives the dependent care benefits from the employers as indicated in the Form W2 as well as Wage and Tax Statement, then the Part III of Form 2441 must be completed. Taxpayers cannot claim the dependency child care credit if they use Income Tax return for Single and Joint Filers with No Dependents, which is the Form 1040EZ.
Ins and Outs of Dependent Care
The benefits of the dependent care credit are primarily targeted as a tax break for people who work. Everyone knows how expensive child care is. Having this as a benefit for taxpayers who have to work and leave their children at home makes it easier for them to do so because they do not have to stress over their budget and the bills.
Two Major Benefits of Dependent Care Credit:
- This is a tax credit and not a tax deduction. The latter deducts the amount of total income that the taxpayer must pay. A deduction of $1,000 can reduce the tax bill for a mere $150 or $200. Whereas with the former, it directly deducts the taxes – dollar for dollar – which means the tax credit deducts a $1,000 off the tax bill.
- Taxpayers can claim the credit no matter how much their income is. Some tax breaks may have income limits, but these are not available to individuals whose incomes are above the limit. The qualifying child who receives the dependent care credit may receive it in a smaller amount when the taxpayer has a high income.
Dependent Care Credit that Taxpayers Can Claim
For the taxpayers to qualify for the dependent care claim, they must be already paying someone to care for the following:
- A child that is 12 years old or younger at the end of the income tax year when the mentioned child is declared as a dependent on the tax payer’s tax return.
- The taxpayer’s spouse is not able to take care of himself or herself and has been with the taxpayer for more than six months.
- Any dependent who is listed in the taxpayer’s form, as long as he or she is not able to take care of himself or herself and has been residing with the taxpayer in the same home for more than six months.
There are limitations on who can provide the dependency care:
Taxpayers can claim the credit for the cash that they paid for as long as the beneficiary is not the following:
- Spouse of the taxpayer
- Parent of the child that is being taken care of. To elaborate, the taxpayer cannot claim the dependent care credit if they are paying their ex-wife or their ex-husband to take care of the child that they have together. There is no credit here because as a parent, it is the obligation and duty of one to take care of the child.
- Anyone listed as dependent on the tax return.
- The child of the taxpayer who is 18 years old or younger, whether or not he or she is a declared dependent on the tax return. To elaborate, the taxpayer cannot pay his or her 17-year-old teenager to look after the younger sibling to receive the dependency care credit, because, like the example mentioned above, it is a family obligation for the older siblings to take care of the younger ones when the parents are away.
Other Requirements for the Dependency Care Credit
- The taxpayer and the spouse, if married, must have a total of earned income from their jobs. Investment profits or money from non-work income do not count.
- The taxpayer pays for the care so that he or she can look for work. Other situations that are regarded as looking for work is when the taxpayer is a full-time student or a parent that is unable to take care of himself or herself.
- Taxpayers who are married must file together and in a joint tax return.
- Taxpayers must provide the information required, such as name, address, and TIN or Taxpayer Identification Number of the person taking care of the qualifying child. The TIN may be an Employer Identification Number or a Social Security Number.
Calculating Dependency Care Credit
The total amount of the dependency care credit is calculated based on the total expenses of the child and the dependent care alongside the taxpayer’s income. TurboTax guides taxpayers on how to go through the process of calculating the credit and properly filling up the form. This is how it is calculated in general.
- Sum up a number of the care expenses that are qualified for the dependent care credit. The taxpayer can amount to as much as $3,000 per person and $6,000 for more than one.
- If the taxpayer’s employer gives enough money for the child care and the money is withheld from the salary of the taxpayer on a pre-tax agreement, then this must be deducted from the money received in the form of allowable expenses.
- Compare the claimed expenses with the earned income. If the taxpayers are married, then the spouse’s earned income can be taken in the smallest amounts and counted as “allowable expenses.”
- The credit is the percentage of the taxpayer’s allowable expenses. This ranges from 20% to 35%. The higher the income of the taxpayer, the smaller the percentage is, and the dependent care credit is smaller. There is also no upper limit when it comes to the income of the taxpayer whenever the dependent care credit is claimed.
Juggling work and parenthood is not an easy feat and can be quite a challenge especially when the kids are at home and school’s out because it’s summer. Good thing the IRS understands this and provides taxpayers with as much benefit as they can dip their hands into, therefore making parenting an easier task – financially. As long as they meet the requirements and they qualify for the dependent care credit, there surely will be deductions on their tax returns that will allow them to have more money allotted for child care.