Dependent Care Tax Credits | How to Claim

People claim both the federal and state credits by filing the appropriate tax forms.

At the federal level, taxpayers must file either form 1040 (“the long form”) and Schedule 2441 or form 1040A (“the short form”) and Schedule 2 to claim the dependent care credit. They may not file form 1040EZ if they wish to claim the credit. Taxpayers enter qualifying expenses on either Schedule 2441 or Schedule 2 and then look up the credit rate in a table keyed to income. Finally, the taxpayer calculates the credit amount by multiplying the credit rate by the qualifying expenses.

At the state level, taxpayers must file form M-1 and also complete Schedule M-1CD to claim the Minnesota dependent care credit. They also must attach a copy of either federal Schedule 2441 or Schedule 2 to their state tax return. Schedule M-1CD requires taxpayers to fill in the various income items used in calculating the state credit phaseout. The state credit phaseout is based on a broad income measure that includes federal adjusted gross income, nontaxable Social Security benefits, deductible payments to retirement accounts, and welfare benefits. After adding up these income items, the taxpayer looks up the credit amount in a table keyed to income. Taxpayers then compare their state credit with the federal credit computed on Schedule 2441 or Schedule 2 and may claim the smaller of the two as a state credit. Special instructions are provided for taxpayers who claim the young-child credit or who operate a licensed family day care home and are claiming the credit for their own children.

Taxpayers must keep records on the amount paid for dependent care expenses and provide information about the caregiver. Both the federal and state tax forms require taxpayers to report the name and taxpayer identification number of the caregiver. The federal forms also require the caregiver’s address. Also, taxpayers should maintain records, such as receipts or canceled checks, of how much they paid for dependent care expenses throughout the year.

People who have no state income tax liability must file a tax return to claim the dependent care credit as a refund. Individuals with incomes below the filing thresholds generally do not need to file tax returns. However, if they have qualifying dependent care expenses, they must do so to claim the refundable credit. Claimants must complete a Minnesota tax return and either a federal Schedule 2441 or Schedule 2.

Dependent Care Tax Credits | Overview

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, The Minnesota and Federal Dependent Care Tax Credits, written by legislative analyst Nina Manzi.