Dependent Care Credit
The dependent care credit allows individuals to reduce tax payments by claiming expenses paid to care for dependents, or individuals that cannot care for themselves so that the taxpayer can work or look for work.
Do I Qualify for the Dependent Care Credit?
Individuals with children or family members that qualify as a dependent for tax filing purposes, and are under the age of 13, can claim care expenses for the dependent care credit. A spouse or other non-qualified dependent who cannot care for themselves and live with you, the taxpayer, for more than half the year can also have care expenses that will qualify for the dependent care credit.
2022 Dependent Care Credit Details
The dependent care credit allows working individuals to increase their tax savings by recovering, through a tax credit, expenses related to caring for children, or others that meet the qualifying person tests, so that you can work or look for work. Several rules and requirements must be met to claim the tax credit. Still, many individuals and families can use this strategy to increase their tax savings and, in many cases, increase their tax refund.
The strategy works by compiling a list of qualified individuals and quantifying different expenses that their care may cost over a calendar year. Qualifying individuals are commonly children under 13 years of age, disabled or special needs children, an elderly parent, or even a spouse that cannot care for themself. Those expenses are combined and then calculated according to the IRS guidelines for earned income, dependent care benefits (such as those offered by employers), and allowable expense limitations.
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Benefits
• Reduces tax due amounts with a dollar-for-dollar credit
• Allows expenses paid for non-dependents to be claimed
• Allows medical care expenses to be claimed when using the standard deduction
Considerations
• Medical care expenses may be more valuable if first claimed as itemized deductions
• Adjusted gross income can limit the value of credits
Assumptions When Taking the Dependent Care Credit
• Individuals listed as ‘Qualified Dependent’ meet the requirements as such.
• The listed medical care expenses are mutually exclusive with any medical expenses claimed as an itemized deduction.
• Dependent care benefits provided by or through an employer or personal business are properly accounted for through payroll processes.
Conflicting Strategies
None noted.
Requirements to Claim the Dependent Care Credit
Generally, to qualify for the credit you must meet the following requirements:
1. Claim only those expenses related to qualified persons
2. You can only claim expenses up to the lesser of earned income (assumed earned income in certain situations, Pub. 503), actual expenses incurred, or IRS expense dollar amount limitations
3. The allowable credit is phased out according to adjusted gross income limitations
Business Entities That Can Claim the Dependent Care Credit
• Individual
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.