The Child and Dependent Care Tax Credit (CDCTC) is often misunderstood by taxpayers, but as their accountant, you have the opportunity to explain to them a valuable deduction for their taxes.
Many taxpayers think this credit is only available for daycare expenses for a child. However, if your client has a spouse or other dependent, regardless of age, who is not capable of self-care, your client may be eligible for the credit. Ask your client:
- Was your child under 13 during the tax year, or did you have a spouse or other dependent living with you for more than half the year who was physically or mentally incapable of self-care?
- If a single parent, were you unable to provide this care because of full-time work, full-time school, or job hunting?
- If married, was at least one parent earning income, and was the other parent unable to provide care because of full-time work, full-time school, disability, or job hunting?
If your client answers yes to question 1 and yes to question 2 or 3, your client qualifies. Even if a spouse was sick or injured for at least half the year and incapable of self-care, the costs of caring for the spouse while your client worked could qualify for this credit.
How much is the benefit?
The CDCTC is worth between 20% and 35% of allowable expenses, decreasing as income increases. The credit can be applied to up to $3,000 of expenses for one child or dependent and up to $6,000 for 2 or more. However, make sure your clients understand that this does not mean they will get a $3,000 tax credit from little Molly’s daycare expenses. It means they will get a percentage of $3,000.
For instance, if Family A makes $15,000 and childcare expenses are $4,000, Family A can claim $3,000 and receive a 35% credit, or $1,050, off the family taxes. If Family B makes $43,000 and has $4,000 of expenses, the family will receive a 20% tax credit on $3,000, or $600 off taxes.
This is not a refundable credit, however. So if Family B can take a $600 credit but only owed $500, then only $500 will be credited.
What are allowable expenses?
- Childcare provided by a babysitter or licensed dependent care center
- The cost of a cook, maid, housekeeper, or other homecare individuals if the person is also providing child or dependent care
- Day camp or summer camp, if chosen to provide care while the parents are working, looking for work, or attending school
- Before-school and after-school care
- Costs for a nurse, home-care, or other care providers for a disabled or ill dependent or spouse
What are not allowable expenses?
- Childcare or dependent care provided by your spouse, your dependent, or the child’s parent
- Costs associated with schooling or tutoring
- Overnight camps
You may be able to provide your clients with a simple, clear worksheet that will help them see at a glance if they qualify and help them list their expenses in each category. Such a worksheet could de-mystify the process and build their confidence that they are getting the most out of the credit. Providing such convenience will likely also increase their appreciation and trust in you as their accountant.