The Child and Dependent Care Credit

October 28, 2014 : Lynn Ebel

Editor’s Note: Kids, as much as you love them, are expensive little creatures! Fortunately, the tax code has some nice credits you can take advantage of. However, you must be careful in your calculators. The Tax Institute breaks down one common scenario.

Question

I will pay $12,000 in day care expenses this year. I also will contribute $5,000 to my employer’s dependent care benefit plan. So the question is, can the remaining $7,000 be used for the child and dependent care credit?

Answer

Not quite! The maximum expense that can be used to calculate the child and dependent care credit is $3,000 for one child or $6,000 for two or more children, reduced by any excluded dependent care benefit (DCB) received.

If the $12,000 expense was for the care of at least two dependents, then only $1,000 of the remaining expense ($6,000 maximum expense vs. $5,000 DCB) may be used to calculate the credit. The resulting credit will be from $200 to $350 based on the percentage (20% to 35%) that applies to your income level.

If the $12,000 expense was for the care of only one child, then no additional tax benefit beyond the DCB is available. That is because the $5,000 DCB is more than the $3,000 maximum expense that can be used to calculate the credit for one child.

Also, we’re assuming that all expenses are qualified expenses and that there are no earned income limitations on you or your spouse.

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Lynn Ebel

The Tax Institute, H&R Block

Lynn Ebel, JD, LLM, is manager of The Tax Institute's research department. Lynn specializes in real estate tax issues, including property transfers, passive activity losses, and bankruptcy issues.

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