New to the Dependent World

[Jaime08]

Married, filing jointly. Both of us work. New to Washington state. I have a 1.5 year old and a 2 month old both in daycare. Fairly still new to filing taxes with dependents and likely didn't do a good job of exploring all there is last year. Given my limited information, what are the tax opportunities I should explore and take advantage of this year?

[xmasbaby0]

Washington state does not have a state income tax, so no worries in regard to preparing a return for WA.   If you lived in any other state before moving to WA in 2022 then you may need to file a part-year return for that other state, though.

The child-related credits you should watch for on your 2022 return are the child tax credit, childcare credit and possibly the earned income credit--if you qualify.  

When you enter your children's information in My Info you will need their Social Security numbers.  Make sure you say they lived with you the whole year   --- even the baby---, and that you say their SSN's are valid for employment.

If your children are in daycare so that you can work, you will need the tax ID or Social Security number of your childcare provider so that you can enter that to get the child and dependent care credit.  Make sure the babysitter knows you will be claiming that credit, especially if the babysitter is working as an independent contractor.

[AnthonyC_CPA]

Hi.  Thank you for participating in this TurboTax event.  Congratulations on both of your children!  As a parent you are eligible for the following credits:

-  Child Tax Credit

 The child tax credit has now reverted in 2022 back to its original limit of $2,000 for every dependent under age 16. Income thresholds for single taxpayers and heads of household are set at $200,000 to qualify (and $400,000 for joint filers).

-  Child and Dependent Care Credit

up to $3,000 of qualifying expenses (for a maximum credit of $1,050) for one child or dependent, or. up to $6,000 of qualifying (for a maximum credit of $2,100) for two or more children or dependents

-  Earned Income Credit

You may be eligible for this credit based on your income level

If you did not take advantage of these credits in 2020 and 2021 it is not too late to amend your tax return for those years.  Th child tax credit was actually higher (up to $3,600 per child) in 2021.

Hope this helps!

AnthonyC, CPA

[Jaime08]

Thank you for the response! Couple follow up questions.

Regarding day care, would the day care facility typically provide tax documents at the end of the year?

Regarding earned income credit - could you please elaborate on that a little more? What is exactly and what/who would qualify? 

[TaxandtheCurious]

Congratulations on your growing family!  In terms of daycare expenses, there is a Child and Dependent Tax Credit, (childcare tax credit) available.  Although it’s primarily aimed at working parents and guardians, the unemployed and full-time students may also qualify for this tax credit.

If you paid for a babysitter, a summer camp,  for a child under the age of 13, or any care provider for a disabled child of any age, you could claim a tax credit of either:

• 20%-35%% of all qualifying expenses up to a maximum credit of $3,000 for one child or dependent.
• The credit also covers up to $6,000 for two or more children.

For tax year 2022, the child tax credit starts phasing out for families with a modified adjusted gross income (MAGI) above $200,000 for single filers (and $400,000 for joint filers).

There is a range of criteria that must be fulfilled to become eligible to claim this tax credit. You must meet the requirements detailed below to claim the Child and Dependent Care Credit on this year’s income tax return:

• You must have earned income. For example, if you’re married but filing jointly, then either you or your spouse must have a form of earned income.
• You must be the parent or the primary caregiver of the dependent claimed.
• The services must have been purchased to either work or search for employment.
• A qualifying child under age 13. The child or dependent must either be disabled or under the age of 13 to be claimed as a dependent for this tax credit.
• The provider of any childcare can’t be a dependent, your spouse, or a parent of the child, even if you’re paying them a salary.

Also, you may want to explore any child and dependent care plans that maybe available thru your employer, such as a Dependent Care FSA. A Dependent Care Flexible Spending Account (DCFSA) is a pre-tax benefit account used to pay for eligible dependent care expenses.  With a Dependent Care FSA, you use pre-tax dollars to pay qualified out-of-pocket-dependent care costs.  Also, the money you contribute to a Dependent Care FSA is not subject to payroll taxes, so you end up paying less in taxes and taking home more of your paycheck. Whereas, the after-tax money you use to pay for childcare expenses has been subject to payroll taxes and you do not receive a refund, tax credit or deduction for these taxes paid thru payroll. 

[Jaime08]

Appreciate the values provided with the response! I'm assuming 100% of the weekly/monthly fees of the day care facility is considered qualifying? Maybe I'm overthinking it but please let me know if it's only certain things. For the 2 kids we have going to day care, the overall yearly fess would exceed the $6000. Is it capped at $6000 regardless and/or are there other ways to use the excess for tax breaks?

[AnthonyC_CPA]

Thank for your follow up question on the Earned Income Credit.  Here is some information regarding that credit:

You typically qualify if:

• You have income from earnings (for example, from a job, your own business, union strike benefits, certain long-term disability benefits).
• You did not receive more than $10,300 in investment income such as interest or dividends, or income from rentals, royalties or stock and other asset sales during 2022.
• You are single or, if married, do not use the Married Filing Separate status (there is an exception for 2021 for married couple filing separately).
• You, your spouse and children, if applicable, all have Social Security numbers.
• You and your spouse are not considered as a qualifying child of someone else.
• You are not excluding any income you earned in a foreign country on your return.
• You are a citizen or resident of the United States.
• You have dependents, or if you don't, you are at least 24 if you were at least a part-time student for at least 5 months of the year, or at least 18 if you are a former foster child after turning 14 or homeless youth,  otherwise at least 19, and you have lived in the United States for more than half of the year.

How much can I earn and still qualify?

This credit is targeted at households with modest incomes, so if you earn "too much" you may not qualify. Just how much can you earn and still qualify? It depends on how many qualifying children you have (we'll define this in a moment). Those with the lowest income qualify for the biggest credits. Those with incomes above the phase-out threshold qualify for lower credits until they reach the point where the credit is eliminated completely. The rules have been liberalized to result in higher credits for many households, especially those with three or more qualifying children. The following table shows the 2022 income limits for receiving credits and the maximum 2022 credit amounts.

If you have:	Your earned income (and adjusted gross income) must be less than:	Your maximum credit will be:
No qualifying children	$16,480 ($22,610 if married and filing a joint return)	$560
1 qualifying child	$43,492 ($49,622 if married and filing a joint return)	$3,733
2 or more qualifying children	$49,399 ($55,529 if married and filing a joint return)	$6,164
3 or more qualifying children	$53,057 ($59,187 if married and filing a joint return)	$6,935

Thanks for contacting TurboTax.

AnthonyC, CPA

[Jaime08]

Thank you! Have absolutely looked into my employers FSA programs! Cheers!

[TaxandtheCurious]

Yes, if it is a qualified childcare expense. You will need too have the Daycare provider's names, address, phone, tax ID and total amount paid. For the childcare tax credit on the tax return, the maximum expenses eligible for the credit are $6,000.  However, there are instances when you may be able to take advantage of both an FSA and the tax credit. Be aware that if you have a dependent care flexible-spending account, the child care expenses you cover through that FSA cannot count toward the tax credit.  The DCFSA max contribution is $5,000 per household. The money in that account is made pre-tax — meaning you already get a tax benefit. You can't double dip.  For example, If you have two or more eligible dependents receiving eligible care, you may set aside up to $5,000 in a Dependent Care FSA and claim $1,000 of the child and dependent care tax credit or vice versa.

Which one will save you more? Well, it depends on your particular tax situation will affect which option makes more sense.

Factors to consider include:

• your income
• your tax bracket
• how many dependents you have

Generally, those with lower income levels (under $30,000 annually) will see a greater advantage to using the Child and Dependent Care Credit. As your income level increases and for higher income earners, the advantages become greater under the Dependent Care FSA, especially if phase-out limits apply. 

[Jaime08]

Awesome, thank you for the feedback!

[SuziM]

Thanks for your participation in our Ask the Expert event regarding "How does the Child Tax Credit and Dependent Care Credit impact this year's tax return for you?"! We’d love to get your input on the event and your TurboTax experience: Click here to leave a video testimonial.