And here’s how Trump’s payroll tax holiday could affect Social Security.
What is the child and dependent care credit?
A taxpayer may claim a child and dependent care credit if that person pays someone to care for his or her dependent under age 13 or for a spouse or dependent who’s unable to care for himself or herself. The credit can be 20 percent to 35 percent of expenses, depending on income. To qualify, the person must pay these expenses so he or she can work or look for work.
When a single person or married couple working full time pay for day care, after-school care or summer care (including day camps ), they can qualify for an income tax credit. Overnight camps don’t qualify.
To claim the credit, the filing status must be single, married filing jointly, head of household or qualifying widow or widower with a dependent child. If a person’s filing status is married filing separately, he or she is not eligible for this credit.
The child and dependent care credit also applies to any qualified dependent, including parents, disabled children over the age of 13 and disabled spouses.
In calculating the credit, the taxpayer will come away with a percentage, based on the taxpayer’s adjusted gross income, of the amount of work-related child and dependent care expenses that he or she paid to a care provider.
A credit of 20 percent to 35 percent of child and dependent care costs is applied directly to the taxpayer’s federal income tax liability. The higher the adjusted gross income, the lower the percentage.
The maximum expense that can be credited under IRS code is $3,000 or $6,000, if the taxpayer household contains more than one dependent.
In addition, a qualified caregiver must give an employer identification number, or EIN, or his or her Social Security number for verification. Care can be offered in or out of the home. Immediate relatives do not qualify as caregivers.
The child and dependent care credit isn’t just a federal income tax credit. It’s also available as a state income tax credit in individual states.
If you’re looking for a personal loan, check out the rates at Bankrate.com.
Child and dependent care credit example
Joan and Mike both work and are sending their 11-year-old son, David, to day camp over the summer. They pay $100 a week for the camp for the 12-week summer break, so they can claim a child and dependent care credit.
Their pay is $60,000, well above the $43,000 limit, allowing only 20 percent of expenses to count toward the credit. That means, they can file for a credit of $200 and reduce their taxes directly by that amount.
Do you need a savings account to create an emergency fund? You’ll find great rates at Bankrate.com.