What is the difference between the child tax credit and the child and dependent care tax credit?

These credits are quite different. First, the child tax credit. The purpose of this credit is simply to provide tax relief for parents, working or not, who have qualifying children under the age of 17 (under the age of 18 for 2021). A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.

If you’re eligible, you may be able to take a credit on your federal income tax return of up to $2,000 per child (in 2020, $3,000 ($3,600 if under age 6) in 2021). The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level. A nonrefundable credit of up to $500 may also be available for qualifying dependents other than qualifying children.

The other credit — the child and dependent care tax credit — offers relief to working people who must pay someone to care for their children or other dependents. You may qualify for a tax credit equal to 20 to 35 percent (in 2020, 50 percent in 2021) of expenses incurred when someone cares for your dependent child (under age 13), your disabled spouse, or your disabled dependent so that you (and your spouse, if married) may work or look for work. The work-related expenses you can use when figuring the credit are limited to $3,000 (in 2020, $4,000 in 2021) for one qualifying individual, and $6,000 (in 2020, $8,000 in 2021) for more than one qualifying individual.

For married persons to qualify for the credit, both spouses must work outside the home, or one must work outside the home while the other is a full-time student, is disabled, or is looking for work (provided that the spouse looking for work has earnings during the year). Married couples must also file a joint income tax return. The credit is also available if you’re a single parent or a divorced custodial parent.

If you would like to discuss the subject further, please contact our team of tax specialists at EagleStone.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matter addressed herein. Securities offered through DAI Securities, LLC, Member FINRA/SIPC. Financial Planning, Wealth Management and Tax Services offered through EagleStone Tax & Wealth. DAI Securities and EagleStone are not affiliated entities. Financial Planning, Investment & Wealth Management services provided through EagleStone Wealth Advisors, Inc. Tax & Accounting services provided through EagleStone Tax & Accounting Services.

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Securities offered through DAI Securities, LLC. Member FINRA/SIPC. Advisory Services offered through EagleStone Tax & Wealth Advisors. EagleStone Tax & Wealth Advisors is not affiliated with DAI Securities. Financial planning, investment and wealth management services provided through EagleStone Wealth Advisors, Inc. Tax and accounting services provided through EagleStone Tax & Accounting Services.

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