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Are You Eligible for a Dependent Care Tax Credit

Date: October, 2016

 

Parents who pay for child care so they can work may be eligible for the dependent care credit, a federal income-tax credit. The credit is based on a percentage of qualifying expenses and reduces your tax bill dollar for dollar. Here’s how it works.

 

Basic Requirements

 

To be eligible, both spouses generally must have some earned income, although exceptions may apply. The IRS limits the dollar amount of qualifying expenses you can claim to $3,000 for the care of one child and $6,000 for the care of two or more children. Note: If you receive benefits from an employer’s dependent care assistance program, these limits are reduced by the tax-free benefit amount you receive. Qualifying expenses may also be limited if one spouse has less than $3,000 (or $6,000) in earned income.

 

Credit Calculation

 

The credit is a percentage of qualifying expenses. The minimum credit rate is 20% (increasing to as much as 35% for lower income families). To estimate your tax savings from the credit, multiply the amount of qualifying dependent care expenses you expect to have by the applicable credit rate (20% in most cases). The maximum credit a dual income couple with one child and qualifying expenses of $3,000 or more might be eligible for is $600 ($3,000 x 20%).

 

Finally, married individuals must file jointly to claim the credit, and children generally must be under age 13.

 

Qualifying Expenses

 

Payments to a nanny, nursery school, or day care center qualify for the credit. But the cost of sending your child to overnight camp doesn’t, nor does the cost of sending your child to first grade or higher.

 

Give us a call today, so we can help you determine the right course of action for you.

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