What Are They and How They Work?
The child and dependent care expense credit is to provide relief for those paying for sitting or care services for the young, old, or disabled. Basically, this allows you to reduce the amount of taxes you pay by calculating the amount you paid (or the limit) multiplied by a percentage depending on your adjusted gross income (AGI) on form 2441. Sound complicated? It is somewhat, but the extra tax savings is worth the headache.
You may only claim this credit for qualifying people for whom you paid for care. For example, you may only claim the credit for a child that is under the age of thirteen and that meets certain other criteria, such as dependent status or qualified status. Care for a person that is disabled may qualify for the credit if the person can be claimed as a dependent or would otherwise qualify as a dependent excluding certain circumstances.
It is important to note that you can only claim this credit if your status is single, head of household, qualified widow, or married filing jointly. You may not claim the credit if your status is married filing separately!
Another notable aspect of claiming the credit is that care must be for the purpose of you and/or your spouse working or looking for work. Therefore, paying for a babysitter so you and your husband can go out to dinner does not qualify; only work related care expenses. However, the expense does not have to be to a care center only; payments to individuals also qualify if the person is over the age of 19 and does not qualify as your dependent, child or spouse.
Unfortunately, there are limits to the credit; specifically, $3,000 for one qualifying person or $6,000 for two or more qualifying persons. So, the more children or other people you are providing care for, the less the credit helps. To calculate the credit, you multiply the actual amount paid for care or the limit, whichever is lower, times a percentage of your adjusted gross income (AGI). This percentage varies from 20% to 35%, depending on your AGI. The higher your AGI, the lower the percentage of care that qualifies for the credit. The 20% limit applies to adjusted gross incomes of $43,000 or more.
Special care should be taken when calculating expenses paid for live-in care. Only the portion paid that is considered work-related may be claimed. If a portion of the expense is for some other purpose, you must calculate the work-related amount and claim only this amount.
Generally, you have to provide the tax identification number of the person or entity you have paid the care expense to in order to claim the credit. However, when dealing with individuals, this is sometimes difficult to do. An individual, such as a babysitter, may be hesitant to provide their social security number to you. If this is the case, you may still claim the credit if you have diligently attempted to retrieve the information.