Child Tax Credits, Dependent Care FSA, and Dependent Care Tax Credits

As a parent of young children, you know that childcare expenses can take a significant chunk out of your budget. However, there are ways to alleviate the financial burden and make child care more affordable. The Child Tax Credit (CTC), the Dependent Care Flexible Spending Account (FSA), and Dependent Care Tax Credits (CDCC). By understanding how these options work, you can make an informed decision and save substantial money.

The child tax credit, commonly referred to as the CTC is available to taxpayers with dependent children under the age of 17. In order to claim the credit when you file your taxes, you have to prove to the IRS that you and your child meet specific criteria. You’ll also need to show that your income falls beneath a certain threshold because the credit phases out in increments after a certain limit is hit. If your modified adjusted gross income exceeds the ceiling, the credit amount you get may be smaller, or you may be deemed ineligible altogether.

In addition to the federal child tax credit, a few states, including California, also offer their own state-level CTCs that you may be able to claim when filing your state return. Visit your state's Department of Taxation website for more details.

Benefits of the federal Child Tax Credit for the year 2022:

1. Increased Credit Amount: In 2022, the Child Tax Credit continues to offer an increased maximum credit amount. Eligible parents can receive up to $3,000 per qualifying child aged 6 to 17 and up to $3,600 for children under six years old. This expansion provides families with a more substantial financial benefit to help offset the costs of raising children.

2. Advance Payments: Similar to 2021, eligible families can receive advance payments of the Child Tax Credit in 2022. These monthly payments, which began in July 2021, are set to continue until December 2022. Families can receive a portion of their estimated credit in advance, providing immediate financial assistance throughout the year.

3. Refundable Credit: The Child Tax Credit remains partially refundable in 2022. If the credit exceeds the amount of taxes owed, families may still be eligible for a refund of the remaining credit amount. This refundable feature can significantly benefit families, particularly those with lower incomes, by potentially putting money back in their pockets.

4. Broader Eligibility: The expanded eligibility criteria introduced in 2021 continue to apply in 2022. More families with moderate to higher incomes now qualify for the Child Tax Credit, allowing a broader range of households to benefit from its financial support.

Dependent Care Flexible Spending Account (FSA): A Dependent Care FSA is an employer-sponsored benefit that allows you to set aside a portion of your pre-tax income to cover eligible child care expenses. The maximum contribution limit for a Dependent Care FSA in 2023 is $10,500 for married couples filing jointly and $5,250 for individuals or married couples filing separately.

Benefits of a Dependent Care FSA:

1. Tax advantages: Contributions to a Dependent Care FSA are not subject to federal income taxes, Social Security taxes, or Medicare taxes. This means you can save significant money by reducing your taxable income.

2. Flexibility: You can use the funds in your Dependent Care FSA to pay for a wide range of qualified childcare expenses, including daycare centers, preschool, before and after-school care, summer day camps, and more.

3. Immediate access: Unlike some tax credits, the funds in your Dependent Care FSA are available to you throughout the plan year, so you can use them as needed, making it easier to manage your child care expenses.

The Child and Dependent Care Tax Credit (CDCC) is designed to provide financial relief to parents who incur childcare expenses while they work or seek employment. This tax credit allows eligible taxpayers to claim a percentage of their qualifying childcare expenses as a credit on their federal income tax return. The credit can be claimed for children under 13 and dependents of any age who are physically or mentally incapable of self-care. The percentage of expenses covered by the credit ranges from 20% to 35% based on the taxpayer's income, with a maximum eligible cost of $3,000 for one child and $6,000 for two or more children. The Child and Dependent Care Tax Credit provide a valuable opportunity for parents to alleviate some of the financial burden associated with child care, ultimately reducing their tax liability and increasing their overall savings.

Benefits of the Child and Dependent Care Tax Credit for parents:

1. Financial Relief: The credit provides significant financial relief by allowing parents to claim a percentage of their childcare expenses as a credit on their federal income tax return. This reduces the overall tax liability, offering substantial savings for families.

2. Coverage for Various Child Care Expenses: The credit covers a wide range of qualifying child care expenses, including daycare centers, babysitters, nursery schools, and summer day camps. This flexibility ensures parents can claim credits for various childcare services, supporting their needs.

3. Graduated Credit Percentage: The credit percentage is based on the taxpayer's income, meaning families with lower incomes may qualify for a higher credit percentage. This results in more significant tax savings, allowing lower-income families to receive a more substantial financial benefit.

4. Support for Working or Job-Seeking Parents: The credit is specifically designed to support parents who are working or seeking employment. It acknowledges the importance of childcare services in enabling parents to participate in the workforce and provides financial assistance to help alleviate the costs associated with child care.

All benefits' eligibility depends on your tax situation, including adjusted gross income and tax filing status.

These tax credits and FSA changes will impact every family differently. As we are not tax professionals, we cannot advise you on the specific impact on your family. It's best to consult with a tax professional or preparer (tax preparation software will also have information). Or visit irs.gov to learn more.