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Child and Dependent Care Credit
The Household and Dependent Care Credit is a nonrefundable tax credit available to United States taxpayers. Taxpayers that care for a qualifying individual are eligible. The purpose of the credit is to allow the taxpayer (or their spouse, if married) to be gainfully employed. This credit is created by 26 U.S. Code (U.S.C) § 21, section 21 of the Internal Revenue Code (IRC).
Federal courts have confirmed that expenses incurred for the care of a dependent, such as babysitting or daycare, while the taxpayer is at work, are not included in deductible business expenses and are not deductible under IRC section 162(a). As a result, single-earner households with qualifying individuals are favored over two-earner households with qualifying individuals, as the cost of daycare often outweighs the extra income made in two-earner households. IRC section 21 serves to lessen this imbalance by allowing a limited credit for certain expenses related to the care of a qualified dependent.
IRC section 21 uses the term "qualifying individual" rather than “dependent" to refer to the types of dependents the care for whom will trigger the credit. Qualifying individuals must be one of four types:
1) Dependents under age thirteen for whom a dependency exemption may be claimed,
2) Dependents of any age who share the same principal place of abode as the taxpayer and are physically or mentally incapable of taking care for themselves,
3) Spouses of any age who share the same principal place of abode as the taxpayer and are physically or mentally incapable of taking care for themselves, or
4) Certain dependent children of divorced parents.
Does the taxpayer "maintain the household"?
The taxpayer must “maintain the household” for the qualifying individual(s), which means the taxpayer must furnish over one-half of the total cost of maintaining the household. In addition, if the taxpayer is married, both the taxpayer and their spouse must have earned income, unless one spouse was either a full-time student or was physically or mentally incapable of self-care.
Does the dependent have the requisite age and relationship?
A taxpayer may be able to claim a dependency exemption for a dependent under the age of thirteen if the dependent is the taxpayer's child, sibling, half-sibling, step-sibling or a descendant of any such individual. For the taxpayer to qualify, the child must not provide more than one-half of his or her own financial support and must have the same principal place of abode as the taxpayer for more than six months of the year.
Creditable expenses include not only those incurred for actual physical care of the dependent but also ancillary “household” services like meal preparation and cleaning. Services outside the home qualify if they involve the care of a qualified child or a disabled spouse or dependent who regularly spends at least eight hours a day in the taxpayer's home. Payments to a relative also qualify for the credit unless the taxpayer claims a dependency exemption for the relative or if the relative is the taxpayer's child and is under age nineteen. No credit is allowed for expenses incurred to send a dependent to an overnight camp.
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Child and Dependent Care Credit
The Household and Dependent Care Credit is a nonrefundable tax credit available to United States taxpayers. Taxpayers that care for a qualifying individual are eligible. The purpose of the credit is to allow the taxpayer (or their spouse, if married) to be gainfully employed. This credit is created by 26 U.S. Code (U.S.C) § 21, section 21 of the Internal Revenue Code (IRC).
Federal courts have confirmed that expenses incurred for the care of a dependent, such as babysitting or daycare, while the taxpayer is at work, are not included in deductible business expenses and are not deductible under IRC section 162(a). As a result, single-earner households with qualifying individuals are favored over two-earner households with qualifying individuals, as the cost of daycare often outweighs the extra income made in two-earner households. IRC section 21 serves to lessen this imbalance by allowing a limited credit for certain expenses related to the care of a qualified dependent.
IRC section 21 uses the term "qualifying individual" rather than “dependent" to refer to the types of dependents the care for whom will trigger the credit. Qualifying individuals must be one of four types:
1) Dependents under age thirteen for whom a dependency exemption may be claimed,
2) Dependents of any age who share the same principal place of abode as the taxpayer and are physically or mentally incapable of taking care for themselves,
3) Spouses of any age who share the same principal place of abode as the taxpayer and are physically or mentally incapable of taking care for themselves, or
4) Certain dependent children of divorced parents.
Does the taxpayer "maintain the household"?
The taxpayer must “maintain the household” for the qualifying individual(s), which means the taxpayer must furnish over one-half of the total cost of maintaining the household. In addition, if the taxpayer is married, both the taxpayer and their spouse must have earned income, unless one spouse was either a full-time student or was physically or mentally incapable of self-care.
Does the dependent have the requisite age and relationship?
A taxpayer may be able to claim a dependency exemption for a dependent under the age of thirteen if the dependent is the taxpayer's child, sibling, half-sibling, step-sibling or a descendant of any such individual. For the taxpayer to qualify, the child must not provide more than one-half of his or her own financial support and must have the same principal place of abode as the taxpayer for more than six months of the year.
Creditable expenses include not only those incurred for actual physical care of the dependent but also ancillary “household” services like meal preparation and cleaning. Services outside the home qualify if they involve the care of a qualified child or a disabled spouse or dependent who regularly spends at least eight hours a day in the taxpayer's home. Payments to a relative also qualify for the credit unless the taxpayer claims a dependency exemption for the relative or if the relative is the taxpayer's child and is under age nineteen. No credit is allowed for expenses incurred to send a dependent to an overnight camp.