2023 dependent care credit remains the same, despite rising costs.
Rates for childcare, dependent care soared; no changes made to tax credit
APPLETON, Wis. (Jan. 1, 2024) – While child and dependent care costs increased in 2023, working taxpayers have not received an increase in tax benefits to help pay for their care. Inflation has especially impacted child and dependent care providers, causing them to increase the amounts they charge by double the overall rate of inflation for 2023.
Since the government does not adjust the credit amount for inflation each year, eligible taxpayers won’t see an increase in the credit amount to offset their rising expenses.
In response to the COVID-19 pandemic, Congress increased the child and dependent care credit to $8,000 for one child, but in 2022, the credit amount reverted to 2020 levels and has not increased for 2023. This means eligible expenses have a dollar limit of $3,000 for one qualifying individual or $6,000 for two or more.
For taxpayers with an adjusted gross income (AGI) of $15,000 or less, the credit amount is 35% of employment-related child and dependent care expenses. The maximum credit dollar amount is $1,050 ($3,000 x 0.35) for one qualifying individual, or $2,100 ($6,000 x 0.35) for two or more.
The credit amount is reduced by one percent for each $2,000 of AGI, or fraction thereof, above $15,000 until the taxpayer’s AGI reaches $43,000. Taxpayers with an AGI over $43,000 are allowed a credit equal to 20% of employment-related child and dependent care expenses.
To qualify for the credit for child and dependent care expenses, the person receiving care must be either the taxpayer’s dependent child under the age of 13 or someone physically or mentally incapable of caring for themselves. That could include the taxpayer’s spouse if they can’t take care of themselves.
If the dependent is not the taxpayer’s spouse or child, the taxpayer must also be the custodial guardian and must live with them more than half the year, even if the taxpayer did not claim them as a dependent.
Only care provided while the taxpayer (and spouse, if applicable) works or looks for work qualifies. If married, taxpayers must file a joint return to claim the credit. Special rules apply for separated parents.
Spouses, the other parent of the taxpayer’s child, the taxpayer’s dependents, and the taxpayer’s children under age 19 do not qualify as caregivers. However, a relative who is not the taxpayer’s dependent may qualify for the credit, even if the relative resides in the taxpayer’s home.