What is a tax credit?

A tax credit is a dollar-for-dollar reduction of the income tax owed to the government. It's different from a tax deduction, which reduces the amount of taxable income. Tax credits can have a more significant impact on a taxpayer's overall tax bill compared to tax deductions. Some common examples of tax credits are the Child Tax Credit and the Earned Income Tax Credit. An example is if you owe $4,000 in federal taxes but are eligible for a $3,000 tax credit, your tax bill is $1,000.

The purpose of tax credits

The purpose of tax credits is to incentivize or reward certain behaviors or activities deemed beneficial to society or to provide financial support to those in need. For example, the Child Tax Credit provides financial support to families with children, while tax credits for education expenses encourage individuals to continue their education. Tax credits can also be used to encourage businesses to engage in research and development or to invest in low-income communities. Overall, tax credits are meant to promote social and economic policies by reducing the tax burden for specific groups of taxpayers, covering a wide range of expenses and situations like education, green energy, and caregiving.

Calculating the Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit (CDCTC) is a tax credit earned by caregivers for a percentage of care-related expenses. Eligible expenses must be for the care of a child or dependent in order to enable the taxpayer to work or look for work.

Simply put CDCTC = eligible expenses x credit %

Given that the average family caregiver spends $7,242 out-of-pocket annually, this tax credit can add up to significant savings quite quickly.

What caregiver expenses qualify?

Qualifying expenses include up to $3,000 expenses for the care of a child under 13 years old or other dependent who is not able to care for themselves (i.e., “a qualifying individual”) that are incurred so the taxpayer (you) can work or look for work.

To be work related, your expenses must allow you to work or look for work. If you are married, generally both you and your spouse must work or look for work.

One spouse is treated as working during any month he or she is a full-time student or isn't physically or mentally able to care for himself or herself.

Your work can be for others or in your own business or partnership. It can be either full-time or part time.

Work also includes actively looking for work. However, if you don't find a job and have no earned income for the year, you can't take this credit (you must have earned income).

An expense isn't considered work related just because you had it while you were working. The purpose of the expense must be to allow you to work. For example, expenses for a hired caretaker that allows you to go out to dinner on the weekends is not a work-related expense.

Who is a qualifying dependent?

Your child and dependent care expenses must be for the care of one or more qualifying persons.

A qualifying person is:

• Your qualifying child who is your dependent and who was under age 13 when the care was provided
• Your spouse who wasn't physically or mentally able to care for himself or herself and lived with you for more than half the year; or
• A person who wasn't physically or mentally able to care for himself or herself, lived with you for more than half the year, and either was your dependent, or would have been except that he or she had gross income of $4,300 or more or filed a joint return

What is the "credit %" or "credit rate"?

The credit % is determined based on your 2022 income:

• Under $15,000: 35%
• $15,000-$43,000: The credit rate gradually declinet for each $1 above $15,000 of income until it reaches 20% at $43,000 of income
• $53,000+: 20%

This means for 2022, you can get up to $1,050 in tax credit ($3,000 in eligible expenses x 35% credit rate). Additionally, you'll get $500 in tax credit for claiming a dependent, meaning you tax credit could be worth $1,550 total.

Other credits you may qualify for

If you qualify for the Earned Income Tax Credit, you may also be eligible for other tax credits, including the following:

• Child Tax Credit
• Credit for Other Dependents
• Education Credits
• Earned Income Tax Credit

What documentation do I need to get tax credit?

The IRS will closely inspect claims for caregiver tax credit. Documentation to prove you are qualified will be required, including identification information for the paid caretaker claimed in the qualified expenses.

How can I get organized to remain eligible?

Givers is a caregiver wellness and support platform. The Givers Debit Card is an easy way to silo your qualified expenses, organize documentation, and seamlessly apply for tax credit at the end of the year. Givers will help you ensure you receive that maximum tax credit that you are qualified for.