Understanding the Child and Dependent Care Credit
How about an update on the Child and Dependent Care Credit?
— Ad Hoc
The Child and Dependent Care Credit (CDC Credit) is an interesting and nonrefundable credit (compared to the Child Tax Credit we discussed last week that, basically, is refundable). The CDC Credit is designed to help a taxpayer (Single or Head of Household) or taxpayers (Married filing jointly) who work outside the home.
At a very high level, here are some key elements to consider about this credit:
Who is a “Qualifying Person” (QP)?
Typically, it is most often a child under 13 who you can claim as a dependent. If the child turns 13 during the year, the child is a qualifying person for the part of the year he or she was under age 13.
The QP can also be your disabled spouse who wasn’t physically or mentally able to care for themselves and lived with you for more than half the year.
It can also be any disabled person who wasn’t physically or mentally able to care for themselves who lived with you for more than half the year and who you can claim as a dependent (or could claim as a dependent except for certain circumstances). Note that this last category does not include members of the Cubs or Yankees on the injured list who, at times, may act like a kid under 13.
What are “Qualifying Expenses” (QE)?
These include amounts paid for “household services” and “care of the qualifying person” while you worked or looked for work.
Household services can include services of a cook, maid, babysitter, housekeeper or cleaning person if the services were partly for the care of the qualifying person. However, they don’t include the services of a chauffeur, bartender or gardener.
Care of the qualifying person are expenses for the care of a qualifying person only if their main purpose is for the QP’s well-being and protection. It doesn’t include the cost of food, lodging, education, clothing or entertainment.
Do’s and Don’ts:
• Don’t include the cost of schooling for a child in kindergarten or above.
• Do include the cost of a day camp, even if it specializes in a particular activity, such as computers or soccer.
• Don’t include any expenses for sending your child to an overnight camp, a summer school or a tutoring program.
• Don’t claim amounts paid to a care provider who is your dependent.
• Do be prepared to pass the “provider identification test” by providing the IRS with any provider’s name, address and their taxpayer identification number (e.g., Social Security, Employer Identification)
What are the limits on this credit?
• The credit computation cap is $3,000 for one qualifying person and is further limited to $6,000 for two or more qualifying persons.
• Credit computation percentage is based on adjusted gross income (AGI). It can be as high as 35% for someone with $15,000 or lower of AGI, and declines to 20% for AGI of $43,000 and over.
• There is an Earned Income Test: You, and your spouse if filing jointly, must have earned income during the year. Your spouse who is either a fulltime student or not able to care for himself or herself may be treated as having earned income. Note that in most cases, if you are married, you must file a joint return to claim this credit.
Ken & Klee’s Notebook
The Internal Revenue Service this week reminded those who may be entitled to the COVID-era Recovery Rebate Credit in 2020 that time is running out to file a tax return and claim their money. Although most taxpayers eligible for Economic Impact Payments linked to the coronavirus tax relief have already received or claimed their payments via the Recovery Rebate Credit, for those taxpayers who haven’t yet filed a tax return for 2020, the legal deadline is May 17, 2024.
The IRS has upgraded its “Where’s My Refund” tool to check the status of your refund. Enhancements for this filing season include: a) Messages about detailed refund status in plain language; b) Seamless access on mobile devices and with the IRS2Go app, and; c) Notifications indicating whether the IRS needs additional information.
During this busy part of filing season, millions of taxpayers are anticipating refunds, and you can begin checking 24 hours after you e-file a current-year return. Note: you must wait four weeks after filing a paper return. Refund information is updated once a day, overnight, and you’ll need three pieces of information to check your status. Namely: your Social Security or individual taxpayer ID number (ITIN), your filing status and the exact refund amount on your return.
Tax Talk is an outreach service of the Notre Dame-Saint Mary’s College Vivian Harrington Gray Tax Assistance Program (TAP).
Rick Klee served as the tax director at the University of Notre Dame from 1998 through August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact Rick at rklee@nd.edu.
Ken Milani, a professor of accountancy at Notre Dame, co-founded the TAP and served as its faculty coordinator for 39 years. Contact Ken at milani.1@nd.edu.
E-mail questions to either.