DEFINITION of Dependent Care Credit

A nonrefundable tax credit offered to taxpayers who pay out-of-pocket expenses for child care. The Dependent Care Credit is intended to assist lower-income working taxpayers with the costs of child care. One of the main criteria to qualify for the credit is that the care must have been provided to a qualifying child under the age of 13, or to disabled dependents of any age, who are physically or mentally incapable of caring for themselves.

BREAKING DOWN Dependent Care Credit

The Dependent Care Credit, frequently referred to as the “Child and Dependent Care Credit” is claimed on Form 2441. The associated childcare costs may include daycare center fees, babysitter fees, summer camp dues and other expenses. Working taxpayers who shell out money to these care providers may qualify for a tax credit of up to 35 percent of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children or dependents.

Some of the qualifications working taxpayers must satisfy in order to qualify for the Dependent Care Credit, include the following:

• Taxpayers and their spouses both must have earned income for the tax year, if they are married and filing jointly.

• A taxpayer must be the custodial parent or main caretaker of the child or dependent.

• The main purpose of the care service must so that a taxpayer can seek or maintain employment.

• The childcare provider may not be a taxpayer’s spouse.

There are some special circumstances, where the IRS may extend exceptions to certain working taxpayers, to let a greater number of families participate in the Dependent Care Credit. For example, if parents of a potential dependent are separated of divorced, the custodial parent, with whom the child resides for the most nights out of the year, may claim the credit even if the other parent has the right to claim the child as a dependent, due to the divorce or separation decree. In addition, a working taxpayer may take the credit for the care of a disabled adult even if the taxpayer cannot claim him or her as a dependent, because the taxpayer has earned too much gross income.

For more information on this credit, see IRS Publication 503.