The Congressional Research Service released a report on child and dependent care tax credits explaining how they work and who receives them. There are two separate tax provisions that help working parents afford child care: (1) the child and dependent care tax credit and (2) the exclusion for employer-provided child and dependent care.
The child and dependent care tax credit (CDCTC) is a nonrefundable tax credit that reduces a taxpayer’s federal income tax amount based on the child and dependent care expenses incurred while working or looking for work. To determine the CDCTC, multiply the amount of qualifying expenses (up to a maximum of $3,000 if the taxpayer has one qualifying child and $6,000 if the taxpayer has more than one qualifying child) by the taxpayer’s credit rate. The credit rate varies based on adjusted gross income with a maximum rate of 35% that declines as adjusted gross income increases, to 20% for taxpayers with adjusted gross income above $43,000.
Taxpayers may also exclude from their income up to $5,000 of employer-sponsored child and dependent care benefits (including dependent care FSA benefits). Taxpayers may be able to claim both the exclusion and the tax credit but not for the same out-of-pocket expenses. Also, for every dollar of employer-sponsored child and dependent care expenses excluded from income, the taxpayer must reduce the maximum amount of qualifying expenses that may be claimed for the CDCTC. Therefore, typically only one benefit (the CDCTC or the employer-provided benefit) is applicable for each taxpayer.
The Congressional Research Service report, which has interesting explanations and statistics about child and dependent care benefits, may be accessed by clicking here.
