Finding quality care for your children while you work or look for work can be costly. Thankfully, the IRS offers the Child and Dependent Care Credit for taxpayers who incur expenses relating to child care in order for them to work. This federal credit also applies to families who pay for the care of an incapacitated spouse or adult dependent. The credit is not refundable; however, it can reduce your tax liability, saving money when it comes to tax time.
To claim the Child and Dependent Care Credit, families must meet ALL of the following:
Have paid for care throughout the tax year for a child under the age of 13 who is claimed as their dependent, a dependent spouse or other adult incapable of self-care who resided with the taxpayer for over six months of the year
The care was required for the taxpayer to go to work or seek employment. In a home with two parents, both parents need to work or look for work during the time the childcare was necessary, unless one parent is a full-time student or not able to care for themselves
The total amount of childcare expenses is less than the total income. Married taxpayers who file a joint return do not go by their combined income. Instead, childcare expenses must be less than the income of the spouse who makes the least. Special rules apply for determining the income of a full-time student or disabled spouse.
Only certain types of childcare qualify for the credit, and it's important to know which are eligible. In many cases, any kind of child or dependent care can qualify, if it was provided at a center, a family day care or church, or in-home care given by a neighbor or relative, with the exception of your spouse, dependent, or child of the taxpayer under the age of 19.
Free child care reimbursement, such as state-subsidized program benefits, do not qualify for the credit. That said, any copayment amounts made by the taxpayer for subsidized care is eligible.
The Earned Income Tax Credit and the Child Tax Credit have no effect on whether one is eligible to claim the Child and Dependent Care Credit. In fact, you may be able to claim all three credits, which can lead to an even bigger savings at tax time.
The credit amount factors the number of children/dependents in the household receiving care, the total household income, and the amount paid in childcare expenses for the year.
There are twenty-six different states that offer a state version of the federal credit, which is refundable in twelve of them. Low-income taxpayers in Arkansas, Colorado, Hawaii, Iowa, Louisiana, Maine, Minnesota, Nebraska, New Mexico, New York, Oregon and Vermont can still receive a refund of the credit even if they don't owe taxes.