Are child/dependent care costs 100% deductible?

I was recently meeting with a new client to gather their information to prepare their individual tax return, and we came across child care expenses. The client asked, “Are these costs fully deductible on my tax return? Do I also get the Child Tax Credit?” My response was, “Sorry they are never deductible, but there are fantastic tax credits.” The Child Tax Credit and the Child and Dependent Care Tax Credit are two different credits.  The Child Tax Credit can only be claimed on a minor dependent child under age 17.  The Child and Dependent Care Tax Credit applies when you are paying for care for someone under the age of 13 or a spouse, or a dependent whom is unable to care for themselves.

Please note these are tax credits, not tax deductions.  A tax credit reduces your tax bill dollar for dollar, which makes it more beneficial.

To claim the child and dependent care tax credit, you must meet all of the following tests:

  1. Qualifying Person Test: A qualifying child under age 13 or a person physically or mentally unable to care for oneself.
  2. Earned Income Test: The taxpayer must have earned income during the year. If filing a joint return, both taxpayers must have earned income.
  3. Work-Related Expense Test: The expenses were used to allow you to work or look for work.
  4. Payment Test: You must be making the child/dependent care payments.
  5. Provider Identification Test: You must provide the name address and taxpayer identification number for the care provider.
  6. Joint Return Test: Your filing status must be single, head of household, qualifying widower. If you’re married you must file a joint return.

How to figure the Child and Dependent Care Credit?

There is a dollar limit for the amount of child and dependent care costs that are eligible for the credit.   If you have only one child/dependent, the most you can claim is $3,000, and for two or more children/dependents the maximum amount is $6,000.

Your credit can range from 20% to 35% of your allowable costs.  If your adjusted gross income is below $15,000, your allowable costs are multiplied by 35%, while if you are on the top end of the chart with income above $43,000, then your allowable costs are multiplied by 20%. There is no phase-out above the 20% threshold, which means high-income taxpayers are still eligible.

The Child Tax Credit has different rules. To claim this credit, the IRS has six requirements:

  1. Qualifying Person Test: The child/dependent must meet the definition of a qualifying child.
  2. Age Test: Was the child under age 17 by 12/31?
  3. Support Test: Did you pay for over half the support for the year.
  4. Residence Test: Did the child live with you for over half the year?
  5. Dependent Test: Is the dependent claimed on your tax return?
  6. Citizen Test: Was the child a US citizen?

How to figure the Child Tax Credit?

New for 2018: The credit has increased to $2,000 per qualifying child, and the refundable portion is $1,400. The AGI income-phase outs have also increased to $200,000 filing single and $400,000 for married filing joint.  This will mean that more taxpayers will be able to apply these credits than ever before.

New for 2018 is a $500 nonrefundable credit for certain non-child dependents, and children who do not qualify for the $2,000 child tax credit because they are over 16 years old. As you can see while these two credits sound similar, they are very different, and that can cause some confusion.  If you have questions or would like to sit down to discuss your particular situation, please contact a KTLLP professional