There is very often confusion among taxpayers as to the difference between the child and dependent care credit and the child tax credit.  This article is intended to shed some light on the differences between the two.

What is the Child Tax Credit?

The child tax credit is a credit worth up to $1,000 per child under age 17 at December 31^st.  The credit is a nonrefundable credit which is generally limited to the tax liability.

In order to be eligible for the child tax credit the following conditions must be met:

• Eligible children must be under age 17 at yearend
• The child must be your son, daughter, stepchild, foster child, brother, sister, stepsister or a descendant of any of these individuals (for example a grandchild, niece or nephew)
• The taxpayer(s) claiming the credit must have provided more than half of the child’s support
• The child must be claimed as a dependent on the taxpayer’s tax return
• The child must be a US citizen, US national or US resident alien
• The child must have lived with the taxpayer(s) for more than half the year

There are also income limitations which phase this credit out.  The income limitations begin at $110,000 for taxpayers filing jointly ($55,000 for married taxpayers filing separately) and $75,000 for single filers as well as those filing as head of household or qualifying widow(er).

What is the Child and Dependent Care Credit?

The child and dependent care credit is a credit to give some money back to families that incur expenses that enable them to work.

The eligibility requirements are as follows:

• The relationship test is the same as above for the child tax credit
• The expenses must have been incurred before the child reached age 13.  The child does not have to be under 13 at December 31^st but must have been under 13 when the expenses were incurred
• The support test is the same as shown above for the child tax credit
• The taxpayer (and spouse if filing a joint return) must have earned income

Eligible qualifying expenses are as follows:

Dependent care center, such as a day care center

Household services. These may be performed by a maid, housekeeper or babysitter

Household employee. An example of this would be a nanny

There are also overall limits on qualifying expenses ($3,000 for 1 child and $6,000 for 2 or more children).

Lastly there is a sliding scale for how much of the qualifying expenses may be taken as a credit ranging from 35% for taxpayers earning under $15,000 per year to 20% for taxpayers earning $43,000 or more.  The credit is calculated by taking the qualifying costs (let’s use $6,000 in our example) by the appropriate percentage (let’s use 20%) which yields a credit of $1,200.

Conclusion

This article attempts to explain very quickly the child tax and child and dependent care credits, as always, I advise you to meet with a tax professional to help with these credits if you have any questions.