Understanding Dependent Care Credit

To start with, this is all about getting some money back from Uncle Sam if you pay somebody else to watch your kids while you work.  We’re not talking about large amounts, but hey!  Every little bit helps.

First qualification, you must be gainfully employed.  Second, your child must be under 13 years old.

Currently (for the rest of 2022 unless Congress acts to extend the temporary rules), the credit is fully refundable.  (You can collect it even if you don’t owe any Federal Income Tax.)  The maximum credit is 50% of what you paid for childcare services, limited to the first $8,000 for one child, $16,000 for two or more children.  The Credit threshold is gradually reduced only after your Adjusted Gross Income (AGI) exceeds $125,000, maxing out at 20% when AGI reaches $183,000.  If your AGI reaches $438,000, the credit is fully phased out.

Qualified childcare expenses include out of home expenses paid to day care centers and nursery schools.  In-home expenses that you might be able to use include expenses paid to a domestic worker like a housekeeper or cook who also performs childcare services around the home.  Relatives count… such as a parent or in-law, but not anybody who is your tax dependent like a teenage child.  (As this moment, I can hear many collective sighs of disappointment.)

The cost of summer day camps qualifies for the credit.  Overnight camps unfortunately do NOT.  The day camp can even be focused on specific activities, like music, chess, soccer, football, baseball, etc.

Under certain circumstances, the credit can also be extended to dependents other than your kids.  It could go for someone you support such as an elderly parent, aunt or uncle who requires special assistance.  The caretaker does NOT have to be a nurse.

One last limit.  Qualified expenses can not exceed the annual earnings of the lower-paid spouse.  (A spouse who is a full-time student can qualify for special rules.

There are different rules starting in 2023.  (Actually, going back to the rules in place prior to 2021.)  Qualified Expenses drop to $3,000 per child and $6,000 for 2 or more children.  The maximum credit starts at 35% and is phased out down to 20%.  Income limits where phase out ends at 20% is $43,000.  Also, it is not fully refundable.

For those of you who are new to the world of paying for child-care, I can assure you that these credits do NOT come anywhere close to paying for total child-care costs.  Years ago, I worked out a cost comparison to the option of staying at home and watching your own child.  Believe it or not, it’s not very high.  If you have a job for 6 hours a day, working at $15 per hour, you may net about $700 a month additional income.  Now that might be enough for you, but for many, that is not enough for the trade-off of somebody else raising your children.  Just something to chew on.

Have you heard?  Psalm 127:3-4 says, “Behold children are a heritage of Yahweh.  The fruit of the womb is his reward.  As arrows in the hand of a mighty man so are the children of youth.”

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 882-4459.  On the web at BullisAndCo.com  Also on Facebook.