Tax Talk 2016 FAQ

Child and Dependent Child Care Tax Credit

My husband and I both work, and we pay for daycare for our 11-year-old son and our 8-year-old daughter. Do we qualify for any tax breaks?
The child and dependent care tax credit benefits families who, in order to work or look for work, pay someone to care for a dependent child under age 13. The credit also covers care of a spouse or a dependent of any age that is physically or mentally incapable of self-care.

My sister watches my children in the daycare center she runs out of her house. Can I still take advantage of the child and dependent care tax credit?

Almost any type of care qualifies for the credit, regardless of whether it is provided in your home, the residence of a care provider, or at a daycare center or child-care facility. However, no credit is allowed for the expense of sending a child or another dependent to an overnight camp. In addition, the caretaker cannot be someone you can claim as your dependent, or a son or daughter under age 19 at the end of the year.

How much is the child and dependent care tax credit worth?
The child and dependent care credit is a percentage, based on your adjusted gross income (AGI), of the amount of work-related child-care expenses you paid during the year. In general, the higher your child-care expenses and the lower your income, the larger your tax credit. You may take the child and dependent care credit even if you do not itemize your deductions.

There is a dollar limit on the expenses toward which you can apply the credit.  For 2016, maximum qualifying expenses for the child and dependent care credit is $3,000 for taxpayers with one qualifying individual and $6,000 for taxpayers with two or more qualifying individuals.  The percentage of the expenses you can take ranges from a low of 20 percent to a high of 35 percent of expenses paid during the year, depending on your AGI.

Who is eligible to claim the child and dependent care tax credit?
To be eligible to claim the tax credit, you (and your spouse, if you are married) must have paid more than half the cost of maintaining the home in which you and the child or dependent lived. Eligible expenses are also limited by your earned income. In the case of a married couple, both spouses must have earned income from wages, salaries, tips, etc., unless one spouse is a full-time student or is physically or mentally incapable of self-care. The earned income of you or your spouse, whichever is lower, determines the maximum amount of expenses eligible.

Finally, the credit generally cannot be claimed by anyone using the married, filing separately status. A married individual living apart from his spouse may only claim the credit on a separate return if he maintains a household for which he furnished over half the maintenance costs for the tax year, the household is a qualifying individual’s principal place of abode for more than half the tax year, and the other spouse is absent for the last six months of the tax year.

I pay for my daycare with money from my Flexible Spending Account. Do I still qualify for the child and dependent care tax credit?
You cannot use both the tax credit and a dependent care Flexible Spending Account (FSA) for the same expenses. If you receive employer-provided dependent care benefits, the amount must be subtracted from the child-care expenses claimed under the credit.  If in 2016, you use a reimbursement account to pay for $3,000 of the cost to care for two children, you may be eligible for a tax credit of $3,000 based on the difference between your FSA contribution and the maximum tax credit for which you qualify. The amount of any employer-provided dependent care benefits should be shown in Box 10 of your W-2 form.

How do I claim this credit on my taxes?
If you qualify for the child and dependent care credit, you must file either Form 1040 or Form 1040A. If you’re filing Form 1040, complete and attach Form 2441 to your return. Form 1040A filers must use Schedule 2. You cannot use Form 1040EZ if you are claiming the child and dependent care credit. 

 American Institute of Certified Public Accountants Texas State Board of Public Accountancy