Dependent Care Credit (November 2016)

Tax Tips

Child & Dependant Care Credit

By Michael Aston, E.A.
Alhambra Tax Center

If you paid for somebody to care for you child, spouse or dependent, you may be able to claim the Child & Dependent Care Credit on your income tax returns.

Below is the requirement for a dependent child, spouses and other dependents requirement may be a little different. To view all the requirement, see IRS publication 503 or consult with your tax professional.

·       The care must be for your child that is under 13 years of age and you are claiming as a dependent on your tax return. For example, if your child turned 13 on September 16, you can claim the credit for expenses until their 13th birthday, any expenses after that do not qualify.

·       The care must have been provided so you and your spouse (if married) can work, look for work or go to school.

·       Both you and your spouse (if married) must have earned income. One spouse may be considered having earned income if they were a full time student or were physically or mentally unable to care for themselves.

·       The payments for care cannot be paid to your spouse, to the parent of the qualifying person, someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if they are not going to be your dependent. The care provider must be identified on your tax return along with their EIN or social security number.

·       If filing married filing separately, you or your spouse will not be eligible for this credit.

·       The qualifying person must have lived with you for more than half the year. There are exceptions for birth or death of a qualifying person, or a child of divorced or separated parents. See IRS publication for more details.

·       Depending on your Annual Gross income, this credit could be worth up to 35% of your qualifying expenses up to $3000 for a single child and $6000 for two children or more. For example, if you have one qualifying child and you spent $7000 on daycare, only $3000 of the $7000 will go towards the credit calculation. If you had two or more children and you paid $10000 in daycare, only $6000 goes towards the credit. In this last scenario with the $6000, if you made $50000, the credit would be $1200.

·       Some employers may offer tax-free dependent care withholding up to $5000, which shows up on the W2 box 10. If you were to participate in this program, use the $5000 towards daycare and have one child you will not be eligible for the credit, even if you spent $7000. The reason is because you can’t double dip, you are getting the tax free benefit instead of the credit. The withholdings may be more beneficial to you, let say that you are in the 25% tax bracket, your tax saving would be about $1250, instead of the $600 credit. Another scenario if you have two or more kids and you used the tax-free $5000 and spent $10000 on day care, the remaining $1000 from the $6000 will be eligible for part of the credit. Making $50000 or more would it be a $200 credit. If you are thinking of using the employer dependent program, you should consult with your tax professional to see if it benefits you.