The Child and Dependent Care Credit is one of the most common tax credits claimed each year, making it an essential credit for tax preparers to understand. This non-refundable tax credit offers up to $3,000 in tax breaks for eligible individuals (or $6,000 for two or more eligible individuals). Non-refundable credits can reduce your client’s tax liability to zero, but any amount that exceeds the tax owed will not be refunded by the IRS. Here’s what you should know about tax form 2441 to determine your client’s eligibility and calculate the dependent care tax credit.
What is Form 2441?
Form 2441 is used to calculate and claim the Child and Dependent Care Credit, which helps taxpayers offset the costs of childcare or care for other dependents while they work, look for employment, or attend school full-time.
Overall, the key requirements for your client to be eligible for the Child and Dependent Care Credit include:
- Care recipient must be a qualifying person, such as a dependent child under age 13 or a qualifying individual who is physically or mentally incapable of self-care.
- Your client must have incurred expenses for care that allows them (and their spouse, if filing jointly) to work or look for work.
- Their care provider cannot be a relative of the child or dependent, unless the relative is under 19 years old.
- Your client must have earned income.
The following may indicate that your client is not eligible to claim the Child and Dependent Care Credit:
- Care expenses are not incurred when the taxpayer is working, seeking employment, or is a full-time student.
- Care for children over the age of 13.
- Care is provided by a relative living in the same home.
Who qualifies for the Child and Dependent Care Tax Credit?
In general, taxpayers qualify for the credit if they have earned income and paid for the care of a qualifying child or dependent to work, seek work, or be a full-time student. In Publication 503, the IRS provides the following tests and requirements to help determine if a taxpayer qualifies for the credit:
- Qualifying Person Test
- Earned Income Test
- Work-Related Expenses Test
- Provider Identification Test
- Joint Return Test
- Credit income limit
Qualifying Person Test
To qualify for the dependent care credit, the expenses must be for the care of a qualifying person, which includes:
- Qualifying child – For a child to qualify, they must be your client’s dependent and under the age of 13. If the child turned 13 during the tax year, the dependent care credit age limit permits expenses incurred for their care before their birthday to remain eligible for the credit.
- Spouse – A spouse who is physically or mentally unable to care for themselves may also qualify.
- Other Dependents – A person who wasn’t physically or mentally able to care for themselves and lived with your client for more than half the year may be considered eligible for this credit. Typically, this person must be your client’s dependent. (See Publication 503 for exceptions).
Earned Income Test
To qualify for this credit, the taxpayer must have earned income. If your client works and receives wages, salaries, tips, or self-employment income, they meet this requirement. Types of income that do not count as earned income include Social Security disbursements, dividend or interest, unemployment income, capital gains, and rental income from real estate.
For couples who are married and filing jointly, both partners must have earned income. If one spouse was a full-time student or unable to physically or mentally care for themselves, they are treated as having earned income for this credit.
Work-Related Expenses Test
Only care expenses that allow your client to work, seek work, or attend school full-time will count toward the credit. So, paying a babysitter for a date night doesn’t count.
If your client only worked, sought work, or attended school full-time for part of the year, they can only claim the credit for those days and cannot include expenses incurred on the non-qualifying days. However, this rule applies only to long periods of not working, seeking work, or attending school. Short absences, such as sick days and vacations of less than two weeks, don’t affect the credit.
For part-time work, only include care expenses that allow your client to work. So, if their child attends daycare for 8 hours a day, but your client only works 4 hours a day, only half of their daycare expenses qualify.
Encourage your clients to keep a record of work-related expenses to ensure the credit is calculated accurately and they are prepared to provide justification for their claim in the case of an audit.
Provider Identification Test
Form 2441 requires the name, address, and Taxpayer Identification Number or Social Security number of the care provider. If necessary, you can use Form W-10 to help your client request this information from their provider.
It’s also important to know that payments made to the taxpayer’s dependent, spouse, or parent of the qualifying child do not count toward the credit. For example, if a parent pays their older child to watch their younger siblings, this does not count towards the credit unless the child is over age 19 and will not be claimed as a dependent.
Joint Return Test
The credit is available to those who file as single, head of household, ormarried filing jointly. It is typically not available to married couples that fileseparately unless they meet the requirements to be considered unmarried. These include being legally separated or living apart from their spouse for the last six months of the year and filing separate returns.
Credit income limit
If your client meets the above requirements, they may qualify to claim a percentage of their childcare expenses. However, the overall deduction is subject to the child care credit limit, which determines the percentage used to calculate the credit amount.
The percentage varies based on the taxpayer’s adjusted gross income (AGI). The childcare credit limit starts at a maximum percentage or 35% for those with an AGI between $0 and $15,000. For every additional $2,000 in AGI, the percentage decreases by 1%.
For example:
- If your AGI is between $0 and $15,000, the percentage is 35%
- If your AGI is between $15,000 and $17,000, the percentage is 34%.
- If your AGI is between $17,000 and $19,000, it drops to 33%.
The lowest percentage used to calculate the credit is 20%, which applies to anyone with an AGI of $43,000 or higher, and there is no upper limit on income.
What is the maximum dollar amount for the Child and Dependent Care Credit?
The maximum Child and Dependent Care tax credit is $3,000 for one qualifying child or dependent or $6,000 for two or more qualifying children or dependents.
Expenses do not need to be equally divided between dependents. So, if a client has $6,000 in qualifying daycare expenses for their 4-year-old and zero expenses for their 6-year-old who attends school, they may still claim the full $6,000.
Things to consider with Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit is a non-refundable credit, meaning it can only reduce tax liability to zero, but not result in a refund if the credit exceeds the tax owed. You and your clients should consider other factors that may impact their eligibility and credit amount.
Dependent care benefits
If your client receives dependent care benefits from their work, these benefits will typically reduce the amount of Child and Dependent Care credit they can claim. For example, if your client’s employer pays $5,000 of childcare expenses for your client’s only qualifying child, this completely offsets the $3,000 dollar limit for the credit, and your client would not be able to claim any Child and Dependent Care credit. However, if their employer pays only $1,000 of childcare expenses, and your client paid $2,000 or more themselves, they may still claim a Child and Dependent Care Credit of $2,000.
Divorced parents or parents who live apart
Even if your client cannot claim their child as a dependent, if they are the custodial parent (usually the parent with whom the child lived for the most nights during the tax year), they may still claim them as a qualifying person for this credit.
