If you are paying someone to take care of your children or another person in your household while you work, you might be eligible for the child and dependent care credit. This credit "gives back" a portion of the money you spend on care, and can reduce your tax bill by hundreds or even thousands of dollars.
Benefits of the tax credit
The child and dependent care credit is a tax break specifically for working people to help offset the costs associated with caring for a child or dependent with disabilities.
There are two major benefits of the child and dependent care credit:
- This is a tax credit, rather than a tax deduction. A tax deduction simply reduces the amount of income that you must pay tax on. A $1,000 deduction, for example, might reduce your tax bill by only $150 or $200 depending on your tax bracket. A tax credit, however, directly reduces your taxes, dollar for dollar. A $1,000 tax credit cuts your tax bill by $1,000.
- You can claim the credit regardless of your income. A lot of tax breaks have income limits and are not available at all to people with incomes above those limits. The child and dependent care credit does get smaller at higher incomes, but it doesn't disappear.
Care you can claim
To qualify for the child and dependent care credit, you must have paid someone, such as a daycare provider, to care for one or more of the following people:
Limits on who can provide care
You can claim the credit for money you paid for care as long as the person you paid was not one of the following people:
There are several other tests you must meet to claim the credit:
Figuring the credit
The size of your credit is based on how much you spend for child and dependent care, as well as your income. TurboTax guides you through the process of figuring your credit and fills in the proper form for you, but in general, it works like this:
While the child and dependent care credit is attractive, you may save even more money with other options. For example, if your employer provides a way to pay for child care with "pre-tax" dollars—that is, money that's taken out of your paycheck before taxes are calculated—the amount you save in taxes may be greater than what you get with the credit.
And while you're at it, take time to learn about other tax breaks available to parents.
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