As you may already know, child care in the United States is expensive. The national average cost is $11,666 per year for each child, however, this can vary dramatically based on the type of daycare center and its location. Fortunately, the Child and Dependent Care Credit is available to taxpayers who have children who are under age 17 at the end of the tax year and could offer relief to parents with children attending daycare.
But what if your child is 17? What if you have kids in college who you support? Or what if you have an aging parent who lives with you? Unfortunately, for 2020, any children who reach their 17th birthday prior to January 1, 2021, are not eligible for the credit. However, there is a Credit for Other Dependents that was created as part of the Tax Cuts and Jobs Act. It is a nonrefundable credit that is worth as much as $500 for each qualifying dependent.
I do want to make one thing very clear - you cannot claim the Child Tax Credit and the Credit for Other Dependents for the same person. And while the $500 credit is one-fourth as much as the Child Tax Credit, it does provide some much-needed tax relief for Americans with dependents who previously didn't qualify for any credits at all!
The Child and Dependent Care Credit is worth 20%-35% of up to $3,000 in qualifying expenses for one child, or up to $6,000 for two or more children. A family with six qualifying children could get $12,000 in credits. The percentage is calculated based on your adjusted gross income, or AGI, and provides 35% credit of qualifying expenses, to those who have an AGI of $15,000 or less. Those who make more will see a 1% decrease for every $2,000 in additional AGI (i.e. 34% for up to $17,000 in AGI, 33% for up to $19,000, etc). Bear in mind that the lowest percentage you can qualify for is 20%, regardless of how high your AGI is.
The Child Tax Credit is an example of a partially refundable tax credit. If the taxpayer has zero tax liability in a given year, as much as $1,400 of the Child Tax Credit can still be given to them. As previously explained, the Child Tax Credit is income-restricted just like many other tax credits, although the limitations have become much more generous in recent years as a result of the Tax Cuts and Jobs Act. So naturally, above certain levels of AGI, the credit will begin to phase out – meaning that it is reduced – and if the taxpayer's AGI is greater than an even higher threshold, the credit does disappear entirely.
Now you may be wondering what type of requirements a program like this may have in order to qualify for the benefit and that's where we come in! In order to qualify for the Child and Dependent Care Credit, the following conditions must be met:
You (and your spouse, if applicable) must have earned income. The credit is designed to help people who need child care, so it is only available to working adults. (Note: If you're disabled or attending school full-time, this requirement doesn't apply.)
You paid for child care for a child under age 13. This age limitation doesn't apply if your dependent is disabled.
You don't file your tax return with the Married Filing Separately status.
A question that is often asked is if those child care expenses need to be paid to a business - and no they do not. In other words, if you employ someone to come to your home to watch your children, those expenses could qualify. As long as the person you're paying is not another one of your dependents! So no, you cannot pay your 19-year-old who is home from college to watch your 10-year-old and claim the Child and Dependent Care Credit for those expenses. Again this credit is for working parents who depend on the care.
Lastly, if you use a dependent care flexible spending account (FSA) through your employer to help cover child care costs, you can't use those funds and the Child and Dependent Care Credit to pay for the same expenses. However, since the credit maxes out at $3,000 in expenses per child and the dependent care FSA limit is $5,000 per year, it's fair to assume that many parents can combine these two tax benefits.
If you'd like to receive more information on how you can utilize the Child and Dependent Care Credit, give us a call at 909.938.1445 or email us at taxmdservices@gmail.com