As you complete your taxes this year, it’s important to be aware of all the opportunities for savings that are available to you. After all, filing your taxes correctly is an important way to ensure your finances and budget are on track. The last thing you want after a year of careful budgeting is a hefty tax bill in April. Two of the biggest opportunities for savings — and most helpful as a parent — are the Child Tax Credit and Child and Dependent Care Tax Credit. These credits lower the burden of your tax bill to help with some of the costs associated with having kids.
In this post, we’ll cover what the Child Tax Credit is, how it differs from the Child Care Tax Credit, whether you qualify, and how you can claim them. Read on to find what you need to know to save money on your taxes this April using the Child Tax Credit and Child Care Tax Credit, or, click on one of the links below to jump directly to the section you need.
- What is the Child Tax Credit?
- What is the Child and Dependent Care Credit?
- Key takeaways
What is the Child Tax Credit?
The Child Tax Credit is an outright dollar-for-dollar reduction in the amount a taxpayer owes. It’s no secret that raising a child is expensive. From diapers and daycare to bassinets and babysitters, there are constant expenses that you’ll need to have in mind. Luckily, the Child Tax Credit can reduce the amount that you owe in taxes each year to help ease the burden of childcare costs. As you’re figuring out whether you’re financially ready for a baby, factoring in tax credits can help you get a clearer picture.
You’ll probably be glad to know that recent tax reform has increased the amount that families can claim on the Child Tax Credit. Due to the Tax Cuts and Jobs Act, passed in 2017, the amount of the credit doubled from $1,000 to $2,000 per child. That puts a solid amount of money back in taxpayers’ hands if they qualify for the credit, and means it’s more likely that you’ll receive a sizeable tax refund.
Note: As of now, there are no new Child Tax Credit 2019 changes, and the Tax Cuts and Jobs Act changes remain in place.
How do I qualify for the Child Tax Credit?
There are 5 points of qualification that those claiming the Child Tax Credit must meet:
- The child must be within a certain age range: to access the full value of the credit, the children you claim the credit for must be under the age of 17.
- The child must be either yours, adopted, or legally under your protection. They must also live with you for over half the tax year you claim them. The child doesn’t have to be your biological child, either: siblings as well as step brothers and sisters can be claimed, and so can children you’ve adopted but for whom you haven’t finished filing all the paperwork.
- The child must be a dependent — that means they are not supporting themselves, and they must be under 19, or under 24 and a full-time student. For kids over the age of 16, you can only claim the secondary amount for the credit, up to $500 for each dependent. After age 24, however, you can no longer claim your child or other dependent for the credit.
- The child must be a citizen of the US, a US National (that means they live in one of the U.S. overseas territories), or a resident alien.
- You must earn within the income requirements. Single earners bringing home over $200,000 a year and married joint filers bringing in over $400,000 a year are phased out of the credit.
If it looks like you and your child or dependent meet all those conditions, the next thing you’re probably curious about is how much you can claim.
How much is the Child Tax Credit worth?
According to IRS Publication 972, the credit is worth up to $2,000 for each dependent child. This extends to age 17, and decreases to a maximum of $500 for college-aged children and dependents.
The credit also depends on income.As we saw in the Child Tax Credit eligibility standards, single earners above $200,000 and joint filers above $400,000 are rapidly phased out of qualifying for the credit as income increases. Conversely, those with lower income can claim higher amounts. The exact way to calculate this is included on the Child Tax Credit and Credit for Other Dependents Worksheet.
What is the Child and Dependent Care Credit?
An additional child tax credit is the Child and Dependent Care credit, sometimes called the child care tax credit. It should not be confused with the child Tax Credit, however; the two names are similar, but they’re actually two separate credits that you can claim when you file.
The Child and Dependent Care Credit is a refund for a portion of the expenses you paid to take care of either a child under the age of 13, or an adult who is mentally or physically incapable of providing for themselves. Let’s go over what it takes to qualify, then how much you’ll be able to claim.
How do I qualify for the Child and Dependent Care Credit?
In order to qualify for the credit, you and your claimed dependent must satisfy these conditions:
- The dependent must be a qualifying person: that means either a child under the age of 13 who you can claim as a dependent on your tax return, or an adult who is unable to care for themselves and lived with you for over half a year.
- You must have earned income throughout the year by working. The credit cannot be applied to money you made from interest and dividends.
- The expenses you incurred must be work-related. That means that you’ll have to be able to show that the money you spent on your dependent’s care allowed you to either work or look for work.
- The expenses can’t be paid to someone who is also your dependent, your spouse, or the parent of the person you’re claiming for the credit if that person is your child and under the age of 13.
If you meet these conditions, then you’ll likely be able to get a refund for a portion of your expenses. Like the Child Tax Credit, the amount you qualify for decreases for higher earners. However, unlike that credit, the Child and Dependent Care credit is not completely phased out even for top earners.
How much money can I claim for the Child Care Credit?
The Child and Dependent Care Credit allows you to claim up to 35% of care expenses. For higher earners, that amount is reduced to 20%. The amount that you claim also changes based on the number of dependents that you claim. You can claim a percentage, depending on your income bracket, of up to $3,000 spent on one dependent, and the same percentage of up to $6,000 spent on two or more dependents.
IRS Publication 503 offers a table that shows the percentage you’ll be able to claim for your particular income bracket. However, in order to determine the exact amount you’ll be able to claim, you’ll need to fill out Form 2441, Child and Dependent Care Expenses worksheet. Or, if you use software like TurboTax, the exact amount is calculated based on your responses to prompts you’ll receive related to the tax credit.
If you have kids or other dependents, the Child Tax Credit and Child and Dependent Care Credits are handy ways to offset some financial stress. Don’t stop there, though: the Earned Income Tax Credit is also a great resource for families with lower incomes who are hoping to reduce their tax burden.
Now that we’ve covered the details of the credits, let’s break down a few key points that you might want to remember as you get ready to file your taxes this year. Here is a list of quick takeaways to keep in mind as you figure out your household finances this year:
Child Tax Credit
- You can claim this credit for a child under your care, or a college-aged young adult who you still claim as a dependent.
- The credit is worth $2,000 per child under 17 who is in your care, and $500 for every young adult 17 and over that you claim.
- The credit is available to families who make under $400,000 for married joint-filing earners, and $200,000 for single earners.
- The amount you receive is based on your income: the more you make the less you can claim.
- You can claim the credit by filling out the Child Tax Credit worksheet, then inputting the result on your 1040. Or, you can use tax software that incorporates credits for a more streamlined experience.
Child and Dependent Care Credit
- This credit refunds a portion of the expenses you spent on care for a dependent or child while you either worked or were looking for work.
- It applies to kids age 12 and under, or adults who are physically or mentally unable to care for themselves.
- This credit is available for earners of any income level, but the amount of the credit bottoms out at 20% of care expenses for top earners.
- You can claim your income-determined percentage of up to $3,000 for one dependent or $6,000 for two or more dependents.
It may sound like a headache, but trust us: every bit of savings goes a long way. Whether you choose to invest your refund in a mutual fund or help boost your savings to have a healthy emergency fund, getting back the biggest refund from the IRS is a great way to boost your personal finance goals and help give you and your family a head start on savings in the new year.