Tax credits are powerful tools for reducing tax burdens, offering a dollar-for-dollar decrease in the amount owed to the government; unlike deductions, which lower taxable income, tax credits directly impact the final tax bill, making them a crucial element in tax planning for individuals and businesses.
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 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.
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.
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.
Your child and dependent care expenses must be for the care of one or more qualifying persons.
A qualifying person is:
The credit % is determined based on your 2023 income:
This means for 2023, 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.
If you qualify for the Earned Income Tax Credit, you may also be eligible for other tax credits, including the following:
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.
From encouraging education and childcare to promoting research and development, tax credits are pivotal in shaping social and economic policies. With proper documentation and support platforms, taxpayers can maximize their eligibility for these credits, ensuring they receive the financial benefits they deserve while contributing to societal welfare and economic growth.
