How to Claim the Dependent Care Credit and Taxes on the Social Security Benefits

You figure the credit on Form 2441, where you must also report the caregiver's tax identification number. Dreamstime/TCA

By Joy Taylor From Kiplinger’s Personal Finance

Question: What are the rules for claiming the dependent care credit?

Answer: Expenses for the care of your kids under 13 and other qualifying relatives must be incurred so you can work or look for employment. If you’re taking the credit to help care for a relative who isn’t a qualifying child, such as an aging parent or grandparent, that person needs to have lived with you for more than six months during the year and be unable to care for him or herself.

You figure the credit on Form 2441, where you must also report the caregiver’s tax identification number. The credit is worth 20–35 percent of up to $3,000 in care expenses—$6,000 if you have two or more dependents needing care. That makes the maximum credit for 2024 from $1,050 for one dependent and $2,100 for two or more dependents.

A rare bipartisan Senate bill would raise the dependent care credit. In July, Senators Tim Kaine (D-VA) and Katie Britt (R-AL) introduced legislation to help make childcare more affordable. The bill would increase the top credit to $2,500 for families with one child needing care and to $4,000 for families with two or more dependents. It would also make the credit fully refundable and increase the income phaseout for taking the full credit to $500,000.

Additionally, it would hike the workplace flexible spending account cap. Currently, the maximum dependent care costs that can be funded through a Flexible Spending Account (FSA) are $5,000 per year. The senators propose to increase that amount to $7,500.

This bill doesn’t stand a chance in 2024, but it’s another story next year when many provisions in the 2017 tax reform law expire after 2025.

Question: Who must pay taxes on their Social Security benefits?

Answer: Some people aren’t taxed on their benefits. They include individuals for whom Social Security is the sole or primary source of gross income. Many others unfortunately could owe tax at ordinary income tax rates on up to 50 percent or 85 percent of Social Security benefits, depending on the amount of their provisional income.

Provisional income is generally equal to the combined total of (1) tax-exempt interest, (2) 50 percent of your Social Security benefits and (3) other non-Social-Security income items that make up your adjusted gross income, minus certain deductions and exclusions.

For single filers: If provisional income is less than $25,000, then the benefits are tax-free. If provisional income is between $25,000 and $34,000, then up to 50 percent of benefits is taxable. If provisional income is over $34,000, up to 85 percent is taxed.

For joint filers: If provisional income is less than $32,000, then the benefits are tax-free. If provisional income is between $32,000 and $44,000, then up to half of benefits is taxable. If provisional income is over $44,000, up to 85 percent is taxed.

If you want federal income tax withheld, complete IRS Form W-4V to have 7 percent, 10 percent, 12 percent, or 22 percent of your monthly Social Security benefits taken out.

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