This topic covers the effect of the Tax Cuts & Jobs Act, TCJA, of 2017 on a taxpayer’s ability to claim the Child and Dependent Care Credit.
In New York and other high-tax states, the average annual cost of child care for an infant and 4-year-old is $24,053. The American family is changing. Individuals marry later, divorce more frequently, or live together without being married. Unmarried births, complex custody arrangements, and multiple generations of families living together are more common, but the tax system has not kept pace. Although tax benefits are an important pillar of support for children, understanding who in a complex family should claim them can be difficult. Under the TCJA, the 2017 rules remain intact for this credit.
Recall in Part II, The TCJA doubled the maximum child tax credit from $1,000 to $2,000 for 2018, but about 29 million children under age 17 with at least one working parent will miss out on the full increase because their families earn too little in income or owe too little in taxes.
You will generally qualify for the Child and Dependent Care Credit if you meet all of the following conditions:
- You must have earned income (such as wages from a job). If you are married and filing a joint tax return, your spouse must also have earned income.
- Your filing status is Single, Married Filing Joint, Head of Household, or Qualifying Widow with a Dependent Child.
- You (and your spouse if Married Filing Jointly) earned income from employment or self-employment. You are exempt from this requirement if you were a full-time student or disabled.
- You paid someone to provide care for a Qualifying Person, and the care provider was not someone you could claim as a dependent, the parent of your Qualifying Person, your spouse, or your child under the age of 19 (regardless of whether they are a dependent).
- You had to pay for child or dependent care so that you (and your spouse if Married Filing Jointly) could work, seek employment, or attend school, or if you were disabled.
A Qualifying Person for the Child and Dependent Care Credit can be either of the following:
- Any child who is your dependent under age 13 at the end of 2018 when the care was provided, or
- Your spouse or dependent age 13 or over, if physically or mentally incapable of caring for themselves.
In addition, the Qualifying Person must have lived with you for more than half of the year. There are exceptions for a Qualifying Person who was born or died during the year, and for a child of divorced or separated parents.
How Much Is the Child and Dependent Care Credit Worth?
- The Child and Dependent Care Credit can be worth from 20% to 35% of some or all of the dependent care expenses you paid. The percentage you use depends on your income. If your income is below $15,000, you will qualify for the full 35%. The percentage falls by 1% for every additional $2,000 of income until it reaches 20% (for an income of $43,000 or more).
- The 20%-35% is taken from up to $3,000 of expenses paid for one Qualifying Person, or from up to $6,000 of expenses paid for two or more Qualifying Persons. Therefore, the maximum Child and Dependent Care Credit is worth $1,050 for one dependent child, and up to $2,100 (based on 2 or more dependents and $6,000 or more of qualifying expenses).
- Before figuring the credit, you must reduce your qualifying expenses by any amount of child or dependent care benefits that were provided by your employer (up to $5,000 if MFJ, or $2,500 if MFS) and that you deducted or excluded from your income.
- The Child and Dependent Care Credit is not refundable, so it is not worth anything if you owe no income tax.
How Do I Claim the Child and Dependent Care Tax Credit?
When you provide the information for the credit you must include the Social Security Number (SSN) of each qualifying person in order to claim the credit, as well as the name, address, and taxpayer identification number of your child or dependent care provider.
What If Another Person Claimed My Dependent?
A Qualifying Person for the Child and Dependent Care Credit may only be claimed on one tax return. If a dependent is claimed on more than one tax return (for example, a child is claimed by both divorced parents) the IRS will apply a set of tiebreaker rules to see who gets to claim the dependent.