Child and Dependent Care Credit - Explained
What is the Child and Dependent Care Credit?
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Table of ContentsWhat is the Child And Dependent Care Credit?How Does the Child And Dependent Care Credit Work?How is the Child and Dependent Care Credit Used?Child and Dependent Care Credit EligibilityBasic Rules for a Daycare Provider QualificationConclusionAcademic Research on Child And Dependent Care Credit
What is the Child And Dependent Care Credit?
Child and dependent care credit is a tax credit, usually non-refundable, offered to taxpayers who pay for childcare using money from their own pockets. The main purpose of this credit is to help the low income working taxpayers to pay for childcare. These childcare costs include but are not limited to babysitter fees, daycare payments, and summer camp contributions.
How Does the Child And Dependent Care Credit Work?
The childcare credit originated in 1954 as a deduction for the taxpayer to cater for care expenses. Initially, it was restricted to $600 and only given to the families, where both parents earned an income of $4500 or less. This reached many households and after a decade, it was increased to $900 and the income earnings rose to $6000. Basically, a working taxpayer may qualify for a credit of up to 35 percent for expenses of $3000 for one child. For two children or more dependents will be $6000. The dependent care credit is requested using Form 2441. The process also includes the taxpayer filing Form 1040.
How is the Child and Dependent Care Credit Used?
It is expensive to meet the cost of both childcare and dependent care, especially for those with low income. However, with the help of this credit, you are able to meet those costs with much ease. Some of the costs the credit covers include:
- Childcare payments
- Babysitter's fees
- Dependent/Spouse care providers fees
- Household expenses such as cooking and cleaning fees
Child and Dependent Care Credit Eligibility
For one to be eligible for the child and dependent care credit, he or she must meet the following requirements:
- The child (dependent) must have been living under the taxpayers care, at the time the care was being provided. Also, he/she must have been below the age of 13 years.
- The taxpayer must be the main custodian of the child or dependent.
- Both the working taxpayer and his or her spouse must have earned some income in that year if they are married.
- The dependent or spouse must have been mentally or physically incapable of taking care of oneself. Also, he or she must have lived under the taxpayers care for more than 6 months.
- The taxpayer must provide his or her address, tax ID, and a care providers name. He or she cannot be given credit without providing this information.
- In case the taxpayer has many children who qualify for the childcare credit, then he/she must give proof. The proof here refers to all the expenses the taxpayer has spent on each child separately.
- If the taxpayer is married, he or she must file a married tax return jointly, to qualify for the care credit.
- The taxpayer must have earned his or her income from a job, in order to qualify for the care credit. Note that money from sources such as dividends or investment is not applicable here.
- If by any chance the parents are divorced or separated, the parent who stays with the child a lot can claim the care credit. This can happen even if the other parent still has the right to claim for the care credit.
- The taxpayer and the care provider should not be married to eligible for the care credit.
Basically, the income that taxpayers earn is the one that determines the kind of expenses the credit can compute. For those who are married and file their returns jointly, the expense is restricted to the spouse who is earning less. Note that day camping expenses is also counted as costs for the childcare credit. Any activity the child participates in during the day is covered by the care credit. On the other hand, overnight camps do not qualify for a childcare credit. They can only get medical deductions if the night camp was necessary for mentally or physically disabled dependents. Also, daycare facility expenses do qualify for care credit. However, education expenses do not usually get credit, but, if the child is below the age of kindergarten, he/she then qualify for a childcare credit.
Basic Rules for a Daycare Provider Qualification
Note that the care credit has exceptions when it comes to the daycare provider. According to the provisions, a taxpayers dependent cannot be a care provider. For example, a taxpayer cannot pay his or her daughter to care for his or her spouse. Also, he or she cannot use care credit expenses meant for his or her qualifying dependent for another qualifying parents child. The exceptions include:
- Any dependent listed on taxpayer tax returns does not qualify to be a daycare provider.
- Also, the dependent child's parent cannot qualify to serve as a daycare provider
If you are paying someone to care for your kids while at work, then you qualify for a childcare credit. Nonetheless, the qualification does not only apply to physical care expenses. It can also include household expenses where you pay someone to help in cleaning and preparing meals.