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  • Still Another Tax Benefit for Families! The Child and Dependent Care Credit
  • The Child Tax Credit: Extra Credit for Many Working Families!
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Still Another Tax Benefit for Families! The Child and Dependent Care Credit

What is the Child and Dependent Care Credit?

The Child and Dependent Care Credit is a tax benefit that helps families pay for child care they need in order to work or to look for work. The credit also is available to families that must pay for the care of a spouse or an adult dependent who is incapable of caring for himself or herself. The Child and Dependent Care Credit can reduce the amount of federal income tax a family pays in two ways. For families that pay income taxes but do not owe taxes at the end of the year (because they have fully paid their taxes for the year through payroll withholding), this credit can give them back some or all of the federal taxes that were taken out of the parents' paychecks during the year. For families that end up owing taxes at the end of the year, the credit can lower the amount they must pay to the IRS. In 2009, parents can claim as much as $3,000 per child (up to $6,000 for two or more children). Please note, however, that families earning too little to pay federal income tax cannot use this credit. In this way, the Child and Dependent Care Credit differs from the Earned Income Tax Credit. The EITC can be claimed by families earning too little to pay income tax.

Can families that claim other credits get the Child and Dependent Care Credit?

Yes! The EITC and Child Tax Credit do not affect a family's eligibility for this credit. Claiming all three credits, when possible, may mean even more money back from the IRS.

Twenty-seven states, including Colorado, have Child and Dependent Care Tax Benefits!

Twelve of these states offer a refundable tax credit: Arkansas, California, Colorado, Hawaii, Iowa, Louisiana, Maine, Minnesota, Nebraska, New Mexico, and New York and Oregon. In these states, low-income families that do not owe income tax can still receive a refund in the amount of the state's Child and Dependent Care Tax Credit. For more information, contact the Colorado Department of Revenue at 303-238-7378 or www.revenue.state.co.us/fyi/html/income33.html

Who is eligible for the Child and Dependent Care Credit?

Families can claim this credit if:

• They are paying for care in 2009 for a qualifying child under age 13 claimed as a dependent, or a spouse or dependent not able to care for himself or herself, who lived with the family for more than half of the year, AND
• They needed the child or dependent care to work or look for work (in a two-parent family, both spouses must have needed the child or dependent care to work or to look for work unless one spouse was a full-time student or unable to care for himself or herself), AND
• The amount they are paying for dependent care in 2009 will be less than their income for the year. If taxpayers are married and filing a joint return, they must have paid less for care than the income of the spouse with the lowest earnings. There are special rules for calculating the income of a spouse who was a full-time student or disabled.

Note: In general, the credit can only be claimed for a child claimed as a tax dependent, but there are special rules for children of divorced or separated parents. For information about these rules, call the IRS at 1-800-TAX-1040.

What type of care qualifies for the credit?

Any kind of child or dependent care can qualify, including care at a center, a family day care home or a church, or care provided by a neighbor or a relative (except if provided by a spouse, a dependent, or a child under 19).

If a family receives free child care, such as from a state-subsidized program, that care cannot be used to qualify for the credit. But if only part of a family's child care is subsidized and the family pays for the rest, the amount the family pays can be counted toward the credit.

How does a family benefit from this credit?

The size of the Child and Dependent Care Credit depends on the number of children or dependents in care, a family's income, and the amount the family paid for care during the year. It can be as much as $1,050 for families with one child or dependent in care and up to $2,100 for families with more than one child or dependent in care.

Families can claim only a limited amount of their child care expenses. Families with one child or dependent can claim up to $3,000 in these expenses and families with more than one child or dependent can claim up to $6,000. Eligible families will receive a credit worth between 20 percent and 35 percent of these expenses, depending on their income.

Claiming the Child and Dependent Care Credit Can Boost a Family's Child Tax Credit Refund

Before the changes in the Child Tax Credit (CTC) were enacted in 2001, many low-income families that were eligible for both the CTC and the Child and Dependent Care Credit -- a separate non-refundable credit for families with child care expenses -- could not take advantage of both. Here's why: Most low-income families owe a relatively small amount of income tax. Claiming just one of these two credits would eliminate the family's tax liability, reducing the amount the family owed to zero. Without additional tax liability to offset, the second credit was essentially of no use to such families. In the past, many families chose to claim the CTC and forgo the Child and Dependent Care Credit, which at the time imposed a greater paperwork burden and would yield no additional benefit.

Now, families with child care expenses may want to reconsider this decision.

Since the CTC is refundable, families can take advantage of both credits! In fact, by claiming the Child and Dependent Care Credit, which is applied first to reduce or eliminate tax liability, families may ultimately get a higher CTC refund than if they had not claimed their child care expenses.

How do families claim the Child and Dependent Care Credit?

Families must file a federal income tax return-- either Form 1040 or 1040A-- and attach a separate "schedule" or form with their return. With form 1040, families must attach Form 2441. With Form 1040A, families used Schedule 2. Free copies of these forms can be obtained at www.irs.gov/formspubs or by calling the IRS at 1-800-TAX-FORM.

Where can families get more information about this credit?

Families can get free information about the Child and Dependent Care Credit and other tax matters by calling the IRS at 1-800-TAX-1040. Hearing impaired people can call 1-800-829-4059.