People call parenthood a full-time job, a career, a calling—but whatever they call it, they’re getting at one important reality. Being a parent is hard work.
Not only does raising a little one change your life (and your schedule!), but it also changes your budget. You have to pay for clothes, food, visits to the doctor, toys, school, more clothes, shoes, family vacations—you get the idea. Kids are pretty expensive.
And for a lot of people, one of the most challenging costs to deal with as a new parent is childcare. Many parents find themselves in a strange new normal that comes with a difficult decision: Do I stay home to care for my child and quit my job, or do I go to work and lose my income paying for childcare?
The IRS has designed a tax credit specifically to help reduce the potential financial burden associated with childcare and other dependent care, like that of a spouse. At Edge Financial, we believe you should be aware of every tax credit and tax deduction available to you, so that when you file your tax return (or we file it on your behalf), you get the tax savings you deserve.
We’re here to walk you through the Child and Dependent Care Tax Credit.
The Child and Dependent Care Credit can help you cover costs of care. In this article, we’ll be explaining what the tax credit is, who can qualify for it, and some additional info you may need.
The IRS describes the Child and Dependent Care Credit as follows:
“The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent or a spouse.”
The Child and Dependent Care Credit can give you a tax benefit when you pay the costs of care for a child or other qualifying individual so that you can work or search for work. So you know, a tax credit is different than a tax deduction. Tax credits subtract from your total tax bill, while tax deductions only subtract from your taxable income.
With all this in mind, how can you qualify for this credit?
There are a number of specific personal situations that might make you eligible for this care-based credit.
But the whole thing boils down to the person receiving care. As the IRS puts it, the person must be a “qualifying individual.” Here are some examples of qualifying individuals under the credit:
In essence, a qualifying individual is someone who is a young child or is otherwise unable to provide self-care. The expenses must be primarily to ensure the child or person’s protection or well-being. For instance, your child might require daycare or babysitting services while you’re at work, or a dependent may need in-home assisted living care for their basic needs.
The Child and Dependent Care Credit has its limits, but it can really help you out if you’ve paid for child or dependent care in the prior year.
To calculate the credit, you can use expenses up to $3,000 for one qualifying individual or $6,000 for two or more. You’ll need to subtract from that total any benefit you receive from an employer that does not factor into your income.
The credit itself is a percentage of the work-related expenses you paid to a care provider, not a total reimbursement. Depending on your income, the credit is worth up to 35 percent of any qualifying costs for care. So, if your income is lower, you’ll reach the 35 percent—or at least come closer to it than a high earning taxpayer.
As with any other tax credit, plenty of other rules and conditions apply, which you can check out on the IRS’s website. What we’re hoping to provide is the need-to-know facts about the Child and Dependent Care Credit so that you can determine whether you might be able to take advantage of it.
If you’re unsure, send us a message. As a part of our expert tax preparation services, we’ll walk you through everything and get to the bottom of your tax return. Savings is just a few moments away.