Why the Child and Dependent Care Tax Credit Is an Important Tax Break You Shouldn't Miss

Why the Child and Dependent Care Tax Credit Is an Important Tax Break You Shouldn't Miss

March 05, 2024

Families with childcare expenses know how difficult it can be in a world of increased inflation, rising cost of living, and minimal wage increases. To help families cope with child and dependent care costs, a new bill, known as The Child and Dependent Care Tax Credit Enhancement Act of 2024, has secured a temporary expansion of the previous act to increase the financial assistance provided to families with childcare expenses. The act offers families some relief from the financial burden stemming from the cost of daycare centers, after-school programs, hiring a nanny, and even summer camps.


This is an important tax break that should not be overlooked. Here are some details you should know:


Amount of credit available

The maximum credit a family can receive in 2024 is $4,000 for one child with a ceiling of $8,000 for two or more children. This credit is also set to be indexed to inflation so that over time cost of living doesn’t increase to the point that it would nullify the credit’s benefit.


More families can benefit

Currently, some low-income families can’t take full advantage of the credit because of their lower tax liabilities. As of 2024, this will change. Families owing less in taxes than the value of the credit may still get the full benefit through a credit refund to take advantage of the whole amount offered. This is a significant modification of the bill.


Different than the child tax credit

The Child and Dependent Care Tax Credit Enhancement Act is different than the child tax credit in that it specifies childcare costs. In a survey conducted by Care.com, 49% of families indicated they are planning to spend around $18,000 on childcare costs in 2024. From the same study, 23% of the households interviewed were looking at care costs in excess of $36,000 for the year. Those are especially big numbers for families that can’t afford it.


To Qualify

According to the Internal Revenue Service (IRS), to qualify for the child and dependent care credit, you must meet these criteria:

· Your dependent qualifying child was under age 13 when they received care.

· Your dependent spouse was mentally or physically unable to care for themselves and lived with you for more than half the year.

· An individual who was mentally or physically incapable of care for themselves and lived with you for more than half the year, and either,

     o Was dependent on you, or,

     o Could have been your dependent, however, he or she received gross income of $4,700 or more, or filed a joint tax return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on someone else’s tax return.

· Children of divorced or separated parents or parents living apart may qualify, though this can become complex. A child may be treated as the qualifying individual of the custodial parent even if the noncustodial parent is entitled to claim the child.


Dollar limit for 2023

For your 2023 tax return, total expenses used to calculate the credit cannot exceed $3,000 (for one qualifying individual) or $6,000 (for two or more qualifying individuals). Other complexities may come into play, and a financial professional can help you determine how to calculate your credit and the impact on your financial strategy.


Where to report on your tax return

If you qualify for the credit, you fill out Form 2441, Child and Dependent Care Expenses, and attach it to Form 1040, form 1040-SR (U.S. Tax Return for Seniors), or Form 1040-NR (U.S. Nonresident Alien Income Tax Return). If you receive dependent care benefits from your job (the amount can be found on your W-2, Wage, and Tax Statement), you must fill in Part III of Form 2441.


Consider consulting a financial professional

Consider consulting your financial professional. A financial professional can help you understand how the tax credits work and how they can potentially help you with the soaring costs of childcare. They can also help you modify your budget and financial strategy with the money you will save that you can put toward other goals like paying down debt or building an emergency fund.


Important Disclosures:
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LPL Financial does not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.
Sources: Parents Would Get Up to $8,000 Under New Democratic Bill (newsweek.com) A new Senate bill would let parents collect up to $8,000 in tax credits for day care, child care, and nannies (inquirer.com) Topic no. 602, Child and dependent care credit | Internal Revenue Service (irs.gov)
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