If you have a child or other dependent and work outside the home, you may need to pay someone to care for your loved ones. Fortunately, the child and dependent care credit may provide some financial relief. The child and dependent care credit is an income tax credit for up to 35 percent (50 percent in 2021) of certain expenses you paid to provide care for your dependent child, your disabled spouse, or a disabled dependent while you worked or looked for work.
A tax credit represents a dollar-for-dollar reduction of your income tax liability. A deduction, in contrast, only reduces your taxable income.
To be eligible for this credit, you must provide care for a qualifying person, possess earned income, and incur work-related expenses.
Child and dependent care credit
There are several tests that determine if you may take the credit; you must meet all of them. The care must be for one or more qualifying persons who are identified on the form you use to claim the credit
A qualifying person is:
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- Your qualifying child who is your dependent and who was under age 13 when the care was provided (to be your qualifying child, a child must live with you for more than half the year and meet other requirements),
- Your spouse who was physically or mentally unable to care for himself or herself and lived with you for more than half the year, or
- A person who was physically or mentally unable to care for himself or herself, who lived with you for more than half the year, and either was your dependent relative or would have been your dependent except that he or she had (1) gross income equal to or in excess of $4,400 (in 2022), or (2) he or she filed a joint return, or (3) you, or your spouse if filing jointly, could be claimed as a dependent on someone else’s tax return.
A dependent is a person, other than you or your spouse, for whom you could claim an exemption. To be your dependent, a person must be your qualifying child (or your qualifying relative). However, the deductions for personal and dependency exemptions have been suspended for 2018 to 2025, and therefore the amount of the deduction is zero. But in determining whether you may claim a person as a qualifying relative in 2022, the person’s gross income must be less than $4,400 (rather than zero).
You (and your spouse if you’re married) must have earned income during the year.
Work-related expenses only
Your child and dependent care expenses are considered to be work-related only if both of the following are true: (1) they allow you (and your spouse if you’re married) to work or look for work, and (2) they’re for a qualifying person’s care. If you’re married, both you and your spouse generally must work or look for work. Your spouse is treated as working during any month he or she is a full-time student or is physically or mentally unable to care for himself or herself. Your work can be for others or in your own business or partnership. It can be either full-time or part-time.
Work also includes actively looking for work. However, if you don’t find a job and have no earned income for the year, you can’t take this credit. That’s because the credit can’t exceed your earned income.
Whether the expenses you incur are necessary to allow you to work or look for work depends on the facts. In general, dependent care expenses for a period in which you are absent from work are not employment-related. However, if your absence from work is short and temporary (e.g., you have a minor illness or take a brief vacation) and you pay dependent care expenses on a weekly or longer basis, the expenses you pay for child and dependent care during this time will be considered work-related.
If you work part-time, you generally must figure your expenses for each day. However, if you are required to pay for dependent care expenses on a weekly or longer basis, you will not be required to allocate expenses between days worked and days not worked.
To qualify as work-related, your expenses must be incurred to provide care for a qualifying person. Such expenses are considered to be for the care of a qualifying person if the main reason they are incurred is to assure that person’s well-being and protection. Here are some examples of expenses that may qualify as work-related, assuming specific requirements are met:
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- Expenses you incur for some household services (such as the cost of a housekeeper, maid, or cook)
- Fees paid to obtain care (including application fees, agency fees, and deposits) when and if care is actually provided
- The cost of preschool, nursery school, or other similar programs below kindergarten
- Expenses for before-school and after-school care programs
- Expenses for day camps (even for camps that specialize in certain activities)
- The amount you pay to a dependent care provider to transport your child to and from care, even if that cost is billed separately from other care expenses
Payments for services provided outside your home are qualified only if they are incurred for the care of a dependent under age 13, or for any other qualifying individual who regularly spends at least eight hours each day in your home.
Filing status
Generally, married couples must file a joint return to take the credit. However, if you’re legally separated or living apart from your spouse, you may be able to file a separate return and still take it. Special rules apply in the case of divorced or separated parents.
If your spouse died during the year and you don’t remarry before the end of the year, you generally must file a joint return to take the credit. If you do remarry before the end of the year, the credit can be claimed on your deceased spouse’s federal income tax return.
Claiming the credit
You must file Form 2441 with your tax return to claim the credit. The amount of your work-related child and dependent care expenses is first subject to an earned income limit and a dollar limit. The amount of your credit is then determined by multiplying your allowable expenses by a percentage factor based on your adjusted gross income (AGI).
The dependent care tax credit can be an excellent tax savings if it applies to your situation.
If you have questions about how this topic will impact you, Team LittleOwl CPA is here to help. Schedule a discovery call today!
About Tabitha Regan
Tabitha Regan is the Founder and CEO of LittleOwl CPA. Tabitha is a Certified Public Accountant, Certified Financial Planner™ and Personal Financial Specialist. In her 16+ year career span, she has developed an expertise in the specific needs of small businesses and busy professionals with accounting, tax and advisory services.
