Federal Child Tax Credit

Federal Child and Dependent Care Credit

The federal Child and Dependent Care Credit is a tax credit designed to help families pay for their childcare expenses. The credit also helps pay for care of a spouse or other adult who is a dependent. Unlike a tax deduction that reduces your taxable income, this tax credit reduces your tax dollar-for-dollar. Qualifying child or dependent care expenses include day care, camps, and paid care provided by neighbors or relatives.

Who Qualifies for the Child & Dependent Care Credit?

Children under 13 claimed as a dependent or an adult dependent unable to care for themselves. The purpose of the credit is to assist families where both parents (or a single parent) need to leave their children during the day to work and thus seek alternate child care. Families where one parent works and the other parent is a full time student or disabled may also qualify for the credit.

For single income households, the dependent care expenses cannot exceed the income earned by the parent. For two-parent households, the dependent care expenses cannot exceed the earned income of the lesser-earning spouse.

How Do I Claim the Credit?

In order to claim the credit families must file a federal tax return with Form 2441 included. In order to fill out the form taxpayer will need:

  • The childcare provider’s employer identification number (EIN) or social security number if an individual provides the care.
  • The name of the childcare provider.
  • The address of the childcare provider.
  • The amount of childcare expenses paid to the childcare provider for each of their qualifying children.

Currently 24 states, including New Jersey, have their own child and dependent care credit. The New Jersey credit is equal to up to 50% of the taxpayer’s federal child and dependent care credit for taxpayer’s with New Jersey gross income under $150,000.

What are the Benefits of the Child & Dependent Care Credit?

Any taxpayer earning less than $438,000 who pays qualifying child or dependent care expenses is eligible for the credit. The amount of the credit you receive is based on your adjusted gross income (AGI). The 50% amount begins to phase out after the taxpayer’s adjusted gross income is more than $125,000 and completely phases out after $438,000. This dollar-for-dollar reduction of tax is also refundable if the taxpayer does not owe any taxes. In other words, if your credit exceeds the tax owed it will be refunded to you or can be carried forward to help offset any tax liability in the following year.

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