Caring for a dependent can be quite expensive. Sometimes the dependent is your own child and sometimes it is an adult who cannot care for themselves.
The federal government acknowledges the financial strain that caring for a dependent can bring and offers a couple of tax-advantaged opportunities to help.
You should read in depth about the first of these two, the Dependent Care Flexible Spending Account, by clicking here if you have not done so already.
The second is what the Internal Revenue Service refers to as the Child and Dependent Care Tax Credit.
This article will provide you with information on what the Child and Dependent Care Tax Credit is, if you qualify for it, and how it can help you if you do.
Let’s get started.
WHAT IS THE CHILD AND DEPENDENT CARE TAX CREDIT?
The Internal Revenue Service explains that the Child and Dependent Care Tax Credit is a credit provided for a portion of expenses that you assume in order to provide care for a dependent while you either work or look for work.
HOW IS A TAX CREDIT DIFFERENT THAN A TAX DEDUCTION?
According to the Internal Revenue Service, a tax deduction decreases the amount of money used to calculate your taxes. This amount of income is referred to as your Adjusted Gross Income.
In comparison, when you spend money on a qualifying expense, a tax credit is a specified amount of money against the amount the amount of tax money you actually owe to the federal government. If, hypothetically, you didn’t owe any taxes, then that credit can go back into your pocket.
HOW CAN YOU QUALIFY FOR THE CHILD AND DEPENDENT CARE TAX CREDIT?
The official benefits website of the United States federal government, the Internal Revenue Service 2020 tax preparation form titled Publication 503, Child and Dependent Care Expenses and the Internal Revenue Service’s website’s Frequently Asked Questions Section all list valuable information regarding the criteria to qualify for the Child and Dependent Care Tax Credit found below. For more detailed information, please visit these websites as needed.
For the sake of simplicity, these requirements will be broken down into the following categories:
- Requirements on Who Can Receive Paid Care
- Requirements on Who is Eligible to Provide Care to Your Dependent
- Requirements You Must Fulfill
- Considerations Regarding the Dependent Care Flexible Spending Account
Please take note of the bolded “is eligible” or “is not eligible” phrases used below to avoid confusion.
Requirements on Who Can Receive Paid Care:
If you pay an eligible person(s) to provide care to your dependent, then that money is eligible for the Child and Dependent Care Tax Credit if your dependent fulfills one of the following:
- A child you claim on your tax return as a dependent and who, by the end of the year calendar year, is 12 years in age or younger
- Your spouse who is not able to care for him or herself and you have both resided in the same home for at least half of the calendar year
- Any other person you claim as a dependent on your tax return who is unable to care for him or herself
Requirements on Who is Eligible to Provide Care to Your Dependent:
You must have the following information on the person(s) you are paying to care for your dependent:
- Their name
- Their address
- Their Taxpayer Identification Number
If you pay one of the following people to provide care to your dependent, then that money is not eligible for the Child and Dependent Care Tax Credit:
- One of the child’s parents
For example, if you paid your spouse or your ex-spouse to care for your dependent, then that money is not eligible for the Child and Dependent Care Tax Credit.
- One of your children aged 18 years or younger
For example, if you paid your teenaged son or daughter to provide care to one of your dependents but your son or daughter is 18 years old or younger, than that money is not eligible for the Child and Dependent Care Tax Credit.
- Anyone listed as a dependent on your tax return
For example, if you paid your child’s grandparent to provide care to one of your dependents but that grandparent is listed as a dependent on your tax return, then that money is not eligible for the Child and Dependent Care Tax Credit.
Requirements You Must Fulfill:
If you fulfill one of the following, then that money is eligible for the Child and Dependent Care Tax Credit:
- You tax filing status is single, head of household, qualifying widow(er) with a dependent child, or married filing jointly
The Internal Revenue Service does state that filing taxes as married but separate from your spouse can be accepted, but only under certain circumstances. These include:
a.) Being legally separated from your spouse – can allow you to be listed under head of household status
b.) Fulfilling all of the following:
i.) Having your home be the home for your qualifying dependent for more than half of the year
ii.) You pay for more than half of the cost to maintain your home for the year
iii.) Your spouse does not live in the same home as you for more than half of the year
- You are a parent who works and earns income, is looking for work, or is in school
If you are a married parent, then both you and your spouse must each fulfill the above criteria of either working, and earning income, looking for work, or being in school.
In addition, earned income must derive from a job and does not include money earned from investments.
- You need to Pay for Care of Your Dependent While Working, Looking for Work, or in School
Considerations Regarding the Dependent Care Flexible Spending Account:
You cannot double dip by getting Child and Dependent Care Tax Credit for an expense you received reimbursement for through your Dependent Care Flexible Spending Account.
WHAT ARE THE TAX BENEFITS ASSOCIATED WITH HAVING THE CHILD AND DEPENDENT CARE TAX CREDIT?
In assessing the tax benefits of the Child and Dependent Care Tax Credit, we must consider both the amount of credit given and the credit rate utilized.
Tax Credit Amount:
Prior to the American Rescue Plan Act being signed into law on March 11, 2021, the Congressional Research Service lists that the Child and Dependent Care Tax Credit amounts were as follows:
– For one qualifying dependent: Up to a total of $3,000
– For two or more qualifying dependents: Up to a total of $6,000
With the American Rescue Plan Act signed into law, the Congressional Research Service lists the numbers for year 2021 are now increased as follows:
– For one qualifying dependent: Up to a total of $8,000
– For two or more qualifying dependents: Up to a total of $16,000
Credit Rate:
Prior to the American Rescue Plan Act being signed into law on March 11, 2021, the Congressional Research Service states that the credit amounts for the Child and Dependent Care Tax Credit were as listed below. Of note, the Adjusted Gross Income value includes the incomes from both spouses if filing married and jointly.
– For an Adjusted Gross Income of $15,000 or less: 35 percent
– After having at least $15,000 of Adjusted Gross Income, the 35 percent credit rate decreased by one percentage point for every additional $2,000 of Adjusted Gross Income above $15,000 until reaching $43,000.
– For an Adjusted Gross Income of $43,000 or more: 20 percent
With the American Rescue Plan Act signed into law, the Congressional Research Service lists that these numbers for year 2021 are changed as listed below. Again, the Adjusted Gross Income value includes the incomes from both spouses if filing married and jointly.
– For an Adjusted Gross Income of $125,000 or less: 50 percent
– After having at least $125,000 of Adjusted Gross Income, the 50 percent credit rate decreased by one percentage point for every additional $2,000 of Adjusted Gross Income above $125,000 until reaching $183,000.
– For an Adjusted Gross Income of $183,000 – $400,000: 20 percent
– After having at least $400,000 of Adjusted Gross Income, the 20 percent credit rate decreased by one percentage point for every additional $2,000 of Adjusted Gross Income above $400,000 until reaching $438,000.
– For an Adjusted Gross Income of $438,000 or more: 0 percent
Actual Tax Credit Obtained:
With these credit amounts and the credit rate values in mind, the following is a comparison on how much tax credit you would have received prior to the American Rescue Plan Act as well as after the American Rescue Plan Act.
For the sake of consistency, the tax credit amount utilized in these calculations is the maximum value. However, not everyone will have enough eligible expenses to reach this maximum value amount. For example, someone with one eligible dependent can qualify for up to an $8,000 tax credit in 2021, but if he or she only has $4,000 of eligible expenses then $4,000 is the amount that must be used in the below calculations.
To determine the tax credit you would obtain, simply multiply the amount of tax credit you qualify for based on your number of eligible dependents by your credit rate based on your Adjusted Gross Income.
Below are benchmark values. If your Adjusted Gross Income is between these values used, then your corresponding tax credit rate must be adjusted accordingly as described above.
Prior to the American Rescue Plan Act:
- For an Adjusted Gross Income of $15,000 or less:
- For one qualifying individual: $3,000 tax credit amount x 35 percent = a total of $1,050
- For two or more qualifying individuals: $6,000 tax credit amount x 35 percent = a total of $2,100
- For an Adjusted Gross Income of $43,000 or more:
- For one qualifying individual: $3,000 tax credit amount x 20 percent = a total of $600
- For two or more qualifying individuals: $6,000 tax credit amount x 20 percent = a total of $1,200
After the American Rescue Plan Act was Signed:
- For an Adjusted Gross Income of $125,000 or less:
- For one qualifying individual: $8,000 tax credit amount x 50 percent = a total of $4,000
- For two or more qualifying individuals: $16,000 tax credit amount x 50 percent = a total of $8,000
- For an Adjusted Gross Income of $183,000 to $400,000:
- For one qualifying individual: $8,000 tax credit amount x 20 percent = a total of $1,600
- For two or more qualifying individuals: $16,000 tax credit amount x 20 percent = a total of $3,200
- For an Adjusted Gross Income of $438,000:
- For one qualifying individual: $8,000 tax credit amount x 0 percent = a total of $0
- For two or more qualifying individuals: $16,000 tax credit amount x 0 percent = a total of $0
You can see a graphical representation of the above values mentioned on the Congressional Research Service’s website.
WHAT HAPPENS AFTER YEAR 2021?
As of the writing of this article, the changes the American Rescue Plan Act has brought to the Child and Dependent Care Tax Credit are set to expire at the end of 2021. In other words, all previously discussed numerical values will return to their prior levels.
While consideration may be given to extend these changes, the Congressional Research Service provides insight as to the possible consequences of such an extension.
We will have to stay tuned for continued updates.
FINAL THOUGHTS. . .
I hope you found this information on the Child and Dependent Care Tax Credit helpful.
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