Why is it saying I do not qualify for the dependent care tax credit?

[naglerduncan]

We have a high deduction to take for dependent care costs but after I enter the information, it says I do not qualify for the tax credit with no explanation. I've checked the qualifications and we should qualify.

[GeorgeM777]

It is not clear at this point, why you are not getting the dependent care credit.  Thus, let's start with the requirements to claim the credit.  The requirements are that the dependent must be:

• A child aged 12 or younger at the end of the year whom you claim as a dependent on your tax return.
• Your spouse, if that person is unable to take care of himself or herself and has lived in your home for at least half the year.
• Any other person claimed as a dependent on your return if that person can't take care of himself or herself and has lived in your home at least half the year.

Additionally, if you are married, you and your spouse must have earned income such as wages earned from a job.  Investment income, such as dividends and capital gains would not count as earned income.  You must also have paid for the care so that you and your spouse could work or look for work, and you must also file a joint return.  

With regard to the amount you paid, consider that for 2021, total expenses you use to calculate the credit may not be more than $8,000 for one qualifying individual or $16,000 for two or more qualifying individuals. Thus, if the amounts you paid were for just one qualifying individual, you would not be able to figure the credit using more than $8,000 as total expenses. 

To determine the amount of your credit, multiply your work-related expenses (after applying the earned income and dollar limits) by a percentage. This percentage depends on your adjusted gross income shown on Form 1040, 1040-SR, or 1040-NR, line 11. If your adjusted gross income is $125,000 or below, your percentage is 50%. Above $125,000, the 50% credit percentage goes down as income rises. Once your income is $438,000 or above, the credit percentage is zero.  We have included below the 2021 Phaseout Schedule which shows the percentage to use based on your adjusted gross income.

[naglerduncan]

Thank you for this clarifying info.

A major discrepancy I can call out is that the FSA Dependent Care limit for 2021 for married filing jointly was $10,500 yet you are saying the max expense I could use for a single child is $8000. So if we maxed our FSA Dependent Care benefits, that's more than the allowed expense – and the software clearly says the expense must be more than the benefit. Does that mean we can't claim the deduction/credit??

[BillM223]

Yes, the maximum amount you can contribute to a Dependent Care FSA is $10,000 (this year).

Yes, the maximum amount that you can spend on one dependent and still get a tax benefit is $8,000

What happens is that the Dependent Care Credit applies ONLY to expenses that did not come out of your Dependent Care FSA. This is because your Dependent Care FSA is already tax-advantaged (the amount in box 10 on your W-2 is removed from Wages in boxes 1, 3, and 5 before our W-2 is printed.

So, in this example, there are no dependent care expenses that did not come out of the FSA, so there is nothing to apply to the credit.

Please note, the math is different for two children (even if you spent money on only one, just s long as the second child qualified). You are still limited to $10,500 in contributions to your Dependent Care FSA (if you are filing Married Joint, that's for the two of you together), but since you can spend $16,000 on two (or more) qualifying children, this leaves as much as $5,500 that can be applied to the calculation for the credit.