The Dependent Care Credit is an individual tax credit, and the amount can be up to $1,050 for one child, or $2,100 for two or more children.
Your clients may be eligible for this credit if they paid someone to care for either:
- A dependent child age 12 or younger, or
- A spouse or dependent over age 12, if they are physically or mentally incapable of self-care.
The child, or other qualifying person, must have lived with the taxpayer for more than half of the tax year. There are exceptions for birth or death, and for a child of divorced or separated parents.
To qualify, the care must have been provided so that the taxpayer could work or look for work. The taxpayer and the spouse, if married filing jointly, must have earned income from wages, other taxable employee compensation or net earnings from self-employment. One key is that if the taxpayer is married filing jointly, both he/she and the spouse must have earned income. One spouse may be considered as having earned income if he/she were a full-time student or disabled.
The payments for care must be made to a person other than your spouse, the parent of the qualifying person, someone the taxpayer can claim as a dependent or to a child who is under age 18. Your clients will need to have the care provider’s name, address, and Social Security Number (SSN) or Federal Employer Identification Number (FEIN) in order to claim the credit, as well as the total amounts paid for care for each child or qualifying person.
A question that often arises is which child care expenses qualify. The most common types of expenses that quality for this credit are those paid to child care centers or for in-home care, both of which can be either in the taxpayer’s home or in the care provider’s home.
Expenses for food, lodging, clothing, education, mileage and entertainment are generally not eligible for the credit, unless these expenses are incidental to the care. For example, the preschool a child attends provides lunch and snacks as a part of its normal care program, and the cost of these is included in the fee paid. In this case, the total fees paid to the preschool are eligible.
Another common question is whether educational expenses for a child are eligible for this credit. The general rule is that expenses for a child in nursery school, preschool or similar programs for children below the level of kindergarten are considered expenses, which are eligible for the credit. Expenses to attend kindergarten or a higher grade are not eligible for this credit.
After-school care is eligible, but tutoring programs are not eligible for the credit. Camps introduce an interesting divide in light of the guidance provided by the IRS. Day camps that care for a child while the taxpayer works are eligible for the credit, while overnight camps do not support the taxpayer’s ability to work and have been disallowed.
In addition, fees required by the care provider are eligible for the credit, including the following:
- The cost of agencies to arrange a care provider.
- Deposits made to an agency or preschool.
- Application fees.
- IRS Publication 503 Child and Dependent Care Expenses
- IRS Form 2441 Child and Dependent Care Expenses
Looking for more information about how to advise your clients when they have, or are, expecting children? Check out this ProConnect™ Tax Pro Center article, “What You Need to Know When Your Clients Have Children.”