Children are expensive. Congress wants to encourage people to have kids by giving them special tax credits. There are two different tax credits available for taxpayers who support children:
- a child tax credit of $1,000 per child, and
- a child and dependent care tax credit of up to $6,000.
If you qualify, you can get both credits in the same year, and you can still get the tax exemption for children and other dependents. These credits, however, are subject to limitations that can reduce or eliminate the benefit, depending on your circumstances.
Which Children Qualify You for Tax Credits
The child tax credit and child and dependent care tax credit are only available if you have what the IRS calls a “qualifying child.” A qualifying child is a child for whom you can claim a dependency exemption. A qualifying child can be your son, daughter, stepchild, adopted child, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them—for example, your grandchild, niece, or nephew. The child tax credit may be claimed if you have a qualifying child under age 17. The child and dependent care tax credit may be claimed for qualifying children under age 13. If a child turns 17 or 13 during the year, you can get the applicable credit only for the part of the year the child was under the age limit.
Child Tax Credit
Before you get too excited about how much money Junior is going to save you on your taxes, read on. The child tax credit was created for low and middle income taxpayers. It is subject to an income threshold and the amount of credit you can take each year goes down as your income approaches that threshold amount. Here’s how it works.
Everyone with a qualifying child starts out the tax year entitled to a $1,000 credit per child for the tax year. This credit is gradually phased out for taxpayers whose incomes rise up to and above the annual threshold amount specified for the year. Specifically, for each $1,000 that your modified adjusted gross income exceeds the income threshold level, the total child tax credit for a family (not the amount per child) is reduced by $50. If you make too much money, you won’t get any credit at all.
The child tax credit starts to be reduced when income reaches the following levels:
- $55,000 for married couples filing separately,
- $75,000 for single, head of household, and qualifying widow(er) filers, and
- $110,000 for married couples filing jointly.
For example, a married couple filing jointly with one qualifying child gets no child tax credit if their adjusted gross income exceeds $130,000. The $1,000 credit they started the tax year with would be whittled down to zero by 20 $50 reductions.
Child and Dependent Care Tax Credit
Unlike the child tax credit (which you get simply by having a qualifying child), you can use the child and dependent care credit only if you shell out money for child care so that you and your spouse, if any, can work. And, there is no income ceiling on the child and dependent care credit (which is also different from the child tax credit). People with higher incomes get a smaller credit than those with more modest incomes. Here’s how it works.
You qualify for the credit if:
- you have a qualifying child or other dependent under the age of 13, or you have a child over 13 who is totally and permanently disabled
- you incur child care expenses to enable you and your spouse, if any, to earn income
- you and your spouse file a joint tax return (if you’re married), and
- you and your spouse, if any, both work either full or part-time, unless you or your spouse is a full-time student or disabled. (Looking for work counts as being employed.)
The amount of the credit is based on a percentage of the child care expenses you incur on the days that you and/or your spouse work. The percentage ranges from 20% to 35% of expenses, depending on your income. Taxpayers with an adjusted gross income (AGI) of over $43,000 use the 20% amount. Those with an AGI under $15,000 use the 35% amount. Those with AGIs between $15,000 and $43,000 use a percentage based on a sliding scale. However, there is an annual ceiling on the amount of child care expenses that can be taken into account for the credit. The ceilings are $3,000 for one qualifying child and $6,000 for two or more.
If you’re fortunate enough to have an employer that reimburses you for child care expenses, you must deduct the reimbursed amount from your annual child care expenses.
Obviously, you need to keep track of everything you spend on child care during the year and be sure to keep receipts and cancelled checks. Child care expenses include expenses both in and outside your home, such as:
- day care
- nursery school, and
- day camp (but not if the child sleeps overnight at the camp).
The costs of sending a child to school in the first grade or beyond are not included. Nor can you hire your spouse, child, or other dependent as a day-care provider. If your child turns 13 during the year, you can only include those expenses you incur before his or her 13th birthday.
To claim the credit, you’ll have to list on your tax return the name, address, and Social Security number or Employer Identification number of the people you pay for dependent care, so be sure to get this information.