Child/Dependent Care Tax Credit. Am I missing something?

[AMS91515]

Hi guys, 

• I'm attempting to file my taxes on TT and this is our first time utilizing the child care tax credit for daycare expenses. My husband is a full-time employee with a taxable income of around $62K and I'm a full-time college student. We spent $2,560 in childcare expenses in 2021 from Aug-Dec and for some reason its stating that we only qualify for a credit of $625 for this, which is around 24% of the expenses. I assumed that joint filers would receive 50% if their AGI was under $125,000. We do not make any contributions to a childcare plan through his employer or anything like that. Am I doing something wrong or is this accurate? I expected to see a credit of around $1200.  Thanks!  

[BillM223]

Any chance that your husband's W-2 had 1,310 in box 10? This sounds like only $1,250 of your expenses were taken into account (1,250 x 50% = 625), and if there is an entry in box 10, then it must be subtracted from your total expenses before calculating the credit.

[AMS91515]

Thanks for your reply. Box 10 is completely blank and no accidental errors were made in filling out anything. 

[JulieS]

The Child and Dependent Care Credit is based on the lesser of your two incomes. If you did not work during the year, your income is calculated at $250 per month as a student. 

I did the calculation based on you being a student for five months and not having any wages and I got $625. 

$250 X 5 months = $1250   50% = $625

[AMS91515]

I don't understand why it would even matter as to what I paid for childcare expenses in that case, as they are giving me credit for 50% of my "income" and not 50% of what was paid to a childcare center. So, what is being implied is that I could hypothetically pay $8,000 per year to a childcare center, but if I'm a student for 10 months out of the year, the maximum I could receive would be $1250 and not $4000 because it's income-based and not based on how much I pay a childcare center. Thank you for replying. 

[AmyC]

Yes. Students and disabled are not treated the same as those with a working income..   About Form 2441, Child and Dependent Care Expenses - IRS  lines 4 and 5 say:

If You or Your Spouse Was a Student or Disabled

Your spouse's earned income.

Your spouse was a full-time student if he or she was enrolled as a full-time student at a school for some part of each of 5 calendar months during 2021. The months need not be consecutive. A school doesn't include an on-the-job training course, a correspondence school, or a school offering courses only through the Internet. Your spouse was disabled if he or she wasn't physically or mentally capable of caring for himself or herself. Figure your spouse's earned income on a monthly basis.

For each month or part of a month your spouse was a student or was disabled, he or she is considered to have worked and earned income. His or her earned income for each month is considered to be at least $250 ($500 if you had two or more qualifying persons at any time during 2021). Enter that amount on line 5. If your spouse also worked during that month, use the higher of $250 (or $500) or his or her actual earned income for that month.

For any month that your spouse wasn't a student or disabled, use your spouse's actual earned income if he or she worked during the month.

Your earned income.

These rules for a spouse who was a student or disabled also apply to you if you were a student or disabled. For each month or part of a month you were a student or disabled, your earned income is considered to be at least $250 ($500 if you had two or more qualifying persons at any time during 2021). Enter that amount on line 4. If you also worked during that month, enter the higher of $250 (or $500) or your actual earned income for that month.

Both spouses were students or disabled.

If, in the same month, both you and your spouse were either students or disabled, only one of you can be treated as having earned income in that month under these rules.

[AMS91515]

Interesting. Thanks everyone for their replies. I'm still having a hard time wrapping my mind around this. So, if I were an employee and not a college student, we would be entitled to 50% of costs spent on daycare ($1280) as long as our AGI was under $125K but since I'm a college student, they give me half back of my hypothetical income rather than half of what we spent on daycare expenses!? I trust you guys; I guess it just doesn't make any sense to me, as it seemed cut and dry in the regulations that those utilizing the credit would get a percentage back from daycare costs. 

[AMS91515]

Ok, so I found more information on this and you guys are 100% correct. They take into account:

1.) Taxpayer's Income

2.) Spouse's Income

3.) Child Care Costs 

Taxpayers will be entitled to up to 50% of the lesser amount of these three variables. If the student attends school on a full-time basis for 12 months, they could qualify for up to $1,500 credited in childcare expenses provided that this variable (the hypothetical income) is the lesser amount. It all makes sense now, and I hope this could answer questions for other student-parents who may be wondering the same thing. 

[DianeW777]

Yes, you are correct.  The key to the child and dependent care credit is that it depends on expenses and then the income of each spouse.  The lesser of the three will be the number used to determine the allowed credit. 

• What is the child and dependent care credit?

[Opus 17]

@AMS91515 

The credit is provided so that parents can work. As a result, qualifying daycare expenses can’t be higher than the lower spouse‘s income.   

The law provides that a parent who is a full-time student can be credited with the equivalent of $250 per month of income if they have one child and $500 per month if they have two or more children.  This is enough this creates enough imaginary income to allow the parents to qualify for the maximum credit, which is based on qualifying daycare expenses of up to $6000.  

Undortunately, when Congress increased the care expense limit to $16,000 for 2021 in the ARPA act, they did not increase the amount of allowable imputed income for students.  So you are allowed to claim a maximum qualifying income of $250 for each month in which you were a full-time student, which would only permit a maximum credit of 50% of $3000 if you were a full-time student for 12 months. If you were a full-time student for five months, you have a maximum qualifying income of $1250 and so that is the limit of your qualifying daycare expenses.

If you had a full or part-time job, that income would have been used as the qualifying limit instead of the student imputed income allowance.

And yes, if you were a full-time student for 10 months and did not work at all, you would have a maximum imputed income of $2500.  Under the normal rules for the child and dependent care, which the law reverts to for 2022, the maximum credit is 35% of your qualified care expenses, but most people only get 20% of qualified care expenses due to the income phase out provision.

The 2021 credit was extremely generous, don’t get used to it.