The Child & Dependent Care Credit is a critical part of many people’s tax returns. It gives you a reduction in taxes to help pay for the cost of daycare while you work. Here’s how it works!
What Do You Need for the Credit?
The maximum amount of credit you can use is $2,000 for a single dependent. That goes up to $6,000 for two or more people who qualify.
Qualifying dependents must be under age 13. Otherwise, you can use the credit for older dependents or even a spouse who is physically or mentally unable to care for themselves. But with that, you must be able to show earned income—because that’s what the credit is designed to support.
From there, the care expense must be actually incurred. You must be paying for qualified daycare in order to claim the credit. Finally, you must maintain more than half the cost for more than half the year of the home and financial support of your qualified dependent.
How to Use the Credit
Once you know how to qualify for the credit, it’s time to put it in action! Here are some tips to help you maximize your tax savings.
1. Understanding Expense Coverage and Limits
It’s essential to understand that this credit is designed to offset, not fully cover, the costs associated with dependent care. The Child and Dependent Care Credit only covers a portion of your qualified care expenses, ranging from 35% for lower-income households to 20% for higher-income earners.
Also note: If your employer offers daycare reimbursement benefits, these are capped at $5,000 ($2,500 if married filing separately), but you can still claim the credit on any additional qualifying expenses up to $3,000 for one dependent or $6,000 for two or more.
2. Gathering Essential Documentation
To claim the credit, you’ll need proper identification for the care provider. Most daycare centers issue an expense summary with their tax ID at the end of the year. If a private caregiver looks after your dependent, ensure you collect their tax information as well. This documentation is crucial for filing your tax return and claiming the credit accurately.
3. Qualifying Expenses and Flexibility
Qualifying expenses include pre-kindergarten educational programs, summer day camps, and even hiring a nanny while you work. Full-day kindergarten fees, however, do not qualify. Importantly, if you have multiple dependents, care expenses don’t need to be equal across them—for instance, you might spend $5,000 on one child and $1,000 on another. Each situation is unique, so look for professional guidance to ensure you maximize your credit based on your specific circumstances.
Let’s Maximize Your Tax Savings!
Tax credits are great assets, but they aren’t always easy to navigate. When you have questions, our team can help! We’re always looking to help you lower your tax liability—and to educate you along the way. Send us a message to learn more about our tax preparation services.