ST. CROIX INSIGHTS

Strategies to Maximize the Dependent Care Credit in 2024

BY BRETT ANDERSON/ST.CROIX ADVISORS, LLC

The COVID-19 pandemic prompted Congress to boost the tax credit for qualified dependent care expenses, but these adjustments have since expired. To maximize your benefit from this refundable credit in 2024, it’s important to understand the current regulations.

Referred to as the “child care credit,” this credit is primarily utilized for expenses related to caring for children. Here’s the breakdown: The dependent care credit applies to the expenses of caring for children under the age of 13 while you (and your spouse, if applicable) are working. As per the current legislation, parents with an adjusted gross income (AGI) exceeding $43,000 can claim a credit equal to 20% of the first $3,000 of qualified expenses for one child under 13, or 20% of the first $6,000 of eligible expenses for two or more children under 13. Consequently, for most parents, the maximum credit amounts to $600 for one child under 13 or $1,200 for two or more.

Here are five strategies you can employ to potentially increase your credit in 2024:

  1. Compensate family members: Consider compensating your parents for babysitting services provided to your under-13 child, especially if you’re assisting them during challenging times. These payments, if reasonable, qualify for the dependent care credit. Alternatively, payments to another child over the age of 18 may also be eligible.
  2. Broaden household staff duties: If you have a housekeeper or maid, you can specify that part of their responsibilities includes childcare while you’re at work. The IRS allows costs for household services that include childcare, provided the expenses are properly allocated.
  3. Explore specialty day camps: Enrolling your child in a specialty day camp focused on their interests, such as soccer, chess, or science, can qualify for the dependent care credit. Unlike overnight camps, the expenses for these programs are fully eligible for the credit.
  4. Utilize educational pursuits: Both spouses must be “gainfully employed” to qualify for the credit, but the tax definition allows for one spouse to be a full-time student. A spouse who attends classes for at least five months of the year, not necessarily consecutively, can still contribute to meeting the requirements for the credit.
  5. Leverage flexible spending accounts (FSAs): Utilizing a dependent care FSA is often advantageous as it allows you to cover expenses with pre-tax dollars, potentially saving on federal and state income taxes. Although the maximum contribution to a dependent care FSA is $5,000, you can still claim the credit for expenses exceeding this amount.

Before implementing any of these strategies, it’s important to consult with your CPA or tax professional to see if they fit into your overall financial planning. By doing so, you can ensure that you’re maximizing your benefits while staying compliant with current tax regulations.

We’re committed to providing you with personalized insights and recommendations to help you achieve your financial goals. Whether it’s identifying additional opportunities for tax savings or developing a comprehensive financial plan, we can guide you every step of the way.

 

The COVID-19 pandemic prompted Congress to boost the tax credit for qualified dependent care expenses, but these adjustments have since expired. To maximize your benefit from this refundable credit in 2024, it’s important to understand the current regulations.

Referred to as the “child care credit,” this credit is primarily utilized for expenses related to caring for children. Here’s the breakdown: The dependent care credit applies to the expenses of caring for children under the age of 13 while you (and your spouse, if applicable) are working. As per the current legislation, parents with an adjusted gross income (AGI) exceeding $43,000 can claim a credit equal to 20% of the first $3,000 of qualified expenses for one child under 13, or 20% of the first $6,000 of eligible expenses for two or more children under 13. Consequently, for most parents, the maximum credit amounts to $600 for one child under 13 or $1,200 for two or more.

Here are five strategies you can employ to potentially increase your credit in 2024:

  1. Compensate family members: Consider compensating your parents for babysitting services provided to your under-13 child, especially if you’re assisting them during challenging times. These payments, if reasonable, qualify for the dependent care credit. Alternatively, payments to another child over the age of 18 may also be eligible.
  2. Broaden household staff duties: If you have a housekeeper or maid, you can specify that part of their responsibilities includes childcare while you’re at work. The IRS allows costs for household services that include childcare, provided the expenses are properly allocated.
  3. Explore specialty day camps: Enrolling your child in a specialty day camp focused on their interests, such as soccer, chess, or science, can qualify for the dependent care credit. Unlike overnight camps, the expenses for these programs are fully eligible for the credit.
  4. Utilize educational pursuits: Both spouses must be “gainfully employed” to qualify for the credit, but the tax definition allows for one spouse to be a full-time student. A spouse who attends classes for at least five months of the year, not necessarily consecutively, can still contribute to meeting the requirements for the credit.
  5. Leverage flexible spending accounts (FSAs): Utilizing a dependent care FSA is often advantageous as it allows you to cover expenses with pre-tax dollars, potentially saving on federal and state income taxes. Although the maximum contribution to a dependent care FSA is $5,000, you can still claim the credit for expenses exceeding this amount.

Before implementing any of these strategies, it’s important to consult with your CPA or tax professional to see if they fit into your overall financial planning. By doing so, you can ensure that you’re maximizing your benefits while staying compliant with current tax regulations.

We’re committed to providing you with personalized insights and recommendations to help you achieve your financial goals. Whether it’s identifying additional opportunities for tax savings or developing a comprehensive financial plan, we can guide you every step of the way.