I am assessing my tax situation for tax year 2022 (not 2021) related to child related credits & deductions. I am confused on what can be claimed and how to reduce the tax bill as much as I can. Here is my situation:
1) Married filing jointly & both spouse work
2) Total household income: around $225,000
3) Kids under age of 13: 2
4) One kid goes to montessori school with expense around $10000 annually.
Questions:
1) Can I claim "Child Tax Credit" (usually around $2000 per child) and also use "Child and Dependent Care Tax Credit" ?
2) Let's say if I can only take advantage of one of above then can I use CTC for one kid and "Child and Dependent Care Tax Credit" for other kid?
3) Is it advisable to use DCFSA to pay for school expense or take "Child and Dependent Care Tax Credit" in tax return?
Here are the links which I referred:
https://turbotax.intuit.com/tax-tips/family/child-tax-credit/L9ZIjdlZz
At the present time, and unless Congress changes the laws again, the maximum dependent care credit is $6000 of expenses if you are paying for the care of two or more qualifying children, and the maximum dependent care FSA is $5000.
You don’t give enough information to answer the question.
First, how many qualifying children do you have? A qualifying child for the child and dependent care question is under age 13 and lives in your home more than half the nights of the year. It is not actually technically required that you pay for care for both children, because form 2441 will operate if you enter a dollar amount for one child and zero dollars for the other child, but you must have two qualifying children to list in order to use the credit on up to $6000 of expenses.
Next, as pointed out, school tuition is eligible for the child care credit if the child’s age kindergarten or less. If the child is over kindergarten age, tuition is not eligible as a dependent care expense.
if we assume that you have two qualifying children to list on form 2441, and your Montessori expenses qualify as dependent care, then, if you list the entire $10,000 of qualifying expenses this is what will happen.
First, any expenses paid from an FSA will be subtracted from the eligible credit amount. This is a maximum of $5000. Any remaining expenses can be applied for the credit. Since you will have listed more than $6000 of expenses but the maximum allowable expense is $6000, you would claim an additional tax credit of 20% of $1000, or $200. If you had no FSA at all, you would claim a credit of 20% of $6000, or $1200 total.
If an FSA is available to you and it is not too late to sign up, the FSA will give you a better tax break than the credit at your income level, because the FSA will save you 31% plus your state income tax, while the credit would save you 20%. (The FSA would save you 24% federal income tax and 7.65% Social Security and Medicare tax.)
@sm3 wrote:
1) Can I claim "Child Tax Credit" (usually around $2000 per child) and also use "Child and Dependent Care Tax Credit" ?
Yes, you can claim both credits for the same child, if you meet the requirements for each credit. The two credits are independent.
However, school tuition for kindergarten and up is not child care and is not eligible for the child and dependent care credit.
@sm3 wrote:
2) Let's say if I can only take advantage of one of above then can I use CTC for one kid and "Child and Dependent Care Tax Credit" for other kid?
Not applicable, because you can claim both credits for the same child.
@sm3 wrote:
3) Is it advisable to use DCFSA to pay for school expense or take "Child and Dependent Care Tax Credit" in tax return?
A dependent care FSA, if you have one available from your employer, usually works out better than the dependent care credit.
Note that the rules for 2022 are up in the air right now. Both credits were increased for 2021. Whether those increases will be extended to 2022 or later is currently being debated in Congress.
You should qualify for both the child tax credit (CTC) and the credit for dependent care, based on current law. Most of the extra $1,600 worth of CTC you won't qualify for, but since your combined income is under $400,000 you will still qualify for around $2,000 CTC for each child.
At your income level, the child care credit will be 20% of up to $16,000 in child care expenses for tax year 2021, so the maximum credit would be $3,200. This is the benefit you get by paying the expenses yourself, rather than through your employer. The law may revert back to the original limit of 20% of up to $6,000 of expenses for tax year 2022, unless the increased limit for 2021 is extended.
[Edited 1/12/22 at 3:09 PST]
At the present time, and unless Congress changes the laws again, the maximum dependent care credit is $6000 of expenses if you are paying for the care of two or more qualifying children, and the maximum dependent care FSA is $5000.
You don’t give enough information to answer the question.
First, how many qualifying children do you have? A qualifying child for the child and dependent care question is under age 13 and lives in your home more than half the nights of the year. It is not actually technically required that you pay for care for both children, because form 2441 will operate if you enter a dollar amount for one child and zero dollars for the other child, but you must have two qualifying children to list in order to use the credit on up to $6000 of expenses.
Next, as pointed out, school tuition is eligible for the child care credit if the child’s age kindergarten or less. If the child is over kindergarten age, tuition is not eligible as a dependent care expense.
if we assume that you have two qualifying children to list on form 2441, and your Montessori expenses qualify as dependent care, then, if you list the entire $10,000 of qualifying expenses this is what will happen.
First, any expenses paid from an FSA will be subtracted from the eligible credit amount. This is a maximum of $5000. Any remaining expenses can be applied for the credit. Since you will have listed more than $6000 of expenses but the maximum allowable expense is $6000, you would claim an additional tax credit of 20% of $1000, or $200. If you had no FSA at all, you would claim a credit of 20% of $6000, or $1200 total.
If an FSA is available to you and it is not too late to sign up, the FSA will give you a better tax break than the credit at your income level, because the FSA will save you 31% plus your state income tax, while the credit would save you 20%. (The FSA would save you 24% federal income tax and 7.65% Social Security and Medicare tax.)
IRS Publication 503, Child and Dependent Care Expenses, page 8, says "Expenses to attend kindergarten or a higher grade aren't expenses for care. Don't use these expenses to figure your credit.
Kindergarten did not used to be universal. I thought kindergarten was on the other side of the line.
@Opus 17 wrote:
Kindergarten did not used to be universal. I thought kindergarten was on the other side of the line.
Kindergarten was "on the other side of the line" for 2004 and earlier. The rule changed for 2005 and later. (Based on past-year editions of Pub. 503.)