The Child and Dependent Care Credit is one of the most common tax credits claimed each year, so every tax preparer should be familiar with its details. Here’s what you should know to determine if your clients qualify and how much they can claim.
What is Form 2441?
Form 2441 is used to calculate and claim the Child and Dependent Care Credit. This credit is designed to help taxpayers with the costs of childcare or care for other dependents, allowing them to work, look for employment, or attend school full-time.
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 six tests to help determine if a taxpayer qualifies for the credit.
Qualifying person test
The expenses must be for the care of a qualifying person, which includes:
- Qualifying child who is your client’s dependent under age 13 (If the child turned 13 during the year, the expenses up until their birthday can still qualify).
- A spouse who is physically or mentally unable to care for themselves
- A person who wasn’t physically or mentally able to care for themselves and lived with your client for more than half the year. Typically, this person must be your client’s dependent. (See Publication 503 for exceptions).
Earned income test
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, dividends 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.
Provider identification test
Form 2441 requires the name, address, and Taxpayer Identification Number or Social Security number. If necessary, you can use Form W-10 to help your client request this information from the care 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. So, if a parent pays their older child to watch their younger siblings, this does not count towards the credit unless the child is 1) over age 19 and 2) will not claimed as a dependent.
Joint return test
The credit is available to those filing single, head of household, and married filing jointly. It is typically not available to married couples who are filing separately 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
The Child and Dependent Care Credit is calculated as a percentage of work-related care expenses. The percentage is based on the taxpayer’s adjusted gross income (AGI). The maximum percentage is 35% for those with an AGI of $0-15,00. For every additional $2,000 in AGI, the percentage decreases by 1. For example, the percentage for an AGI of $15,000 – $17,000 would be 34%. Then, 33% for an AGI of $17,000 – $19,000, and so on.
The minimum percentage used to calculate the credit is 20%, which applies to anyone with an AGI of $43,000 or more, with no upper limits 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.
Note that the 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.
Child and Dependent Care Tax Credit: Things to Consider
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.
The Child and Dependent Care Tax Credit is usually easy to calculate – especially since Form 2441 is supported in your TaxSlayer Pro software. But if you ever have doubts about whether your client qualifies, you can refer to IRS Publication 503 or Instructions for Form 2441 for more details.