Latest news with #dependents
Yahoo
6 days ago
- Business
- Yahoo
Child and dependent care credit: How it works, who qualifies and how much it's worth
As parents know all too well, child care can be almost prohibitively expensive. U.S. families spend up to $15,600 a year on day care — and that's for just one child — according to a 2024 analysis of 2022 data, the most recent available, by the U.S. Labor Department. The federal government helps defray at least some small portion of those costs with the child and dependent care credit, which is currently worth up to $1,050 for some taxpayers with one child or dependent, and up to $2,100 for some taxpayers with two or more children or dependents. The exact amount of the credit depends on your adjusted gross income (AGI) — the higher your income, the smaller the tax credit. Here's what you need to know about how the child and dependent care tax credit works, who qualifies and how much you could receive to help offset the cost of spending thousands of dollars each year on child care. The child and dependent care credit is a tax break to help cover families' child care expenses, so they can continue working or searching for employment. That work could be for your own business, as well as for a full- or part-time job. Be careful not to confuse the child and dependent care credit with the child tax credit, which is not tied to a specific type of spending. You can claim both the child tax credit and the child and dependent care credit in the same year. (Consider the earned income tax credit, too.) The amount of the child and dependent care tax credit you're eligible to claim is a percentage of the expenses you paid to a care provider, depending on how many dependents you have and your household's adjusted gross income (AGI). Qualified taxpayers can claim 20 percent to 35 percent of care expenses, up to a limit of $3,000 of expenses for one child or dependent and up to $6,000 for two or more children or dependents. The 'work-related' qualifier is key. Paying for babysitting or child care expenses to take a vacation, for example, wouldn't be considered a qualifying expense. There's no income limit to be eligible for the credit. Also, the credit isn't refundable. That means it can reduce your tax bill to zero, but you don't get any money back as a refund from this credit. Learn more: 10 easy tax deductions and credits to trim your tax bill Need an advisor? Need expert guidance when it comes to managing your money? Bankrate's AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals. To qualify for the child and dependent care credit, families must have: a qualifying child or dependent, child care expenses that were incurred to work or look for a job, a jointly filed tax return if you're married, unless you're considered legally separate, and earned income during the tax year. Read on for details on each requirement for the child and dependent care tax credit. Your child care expenses must be for children who are younger than 13 years old. In special circumstances, though, taxpayers can claim expenses for care for individuals older than 13 if they're considered physically or mentally incapable of providing their own care and live with you for more than half of the year, according to the IRS. Those could be your dependents, as well as a spouse. See IRS Publication 503 for more details on the definition of a qualifying child or dependent. Eligible caregiving expenses include the cost of putting your child in daycare, preschool, day camp and nannying arrangements. Caretaking can be provided both outside or inside your home, but you'll have to provide the IRS with documentation — usually the caregiver's name and individual taxpayer identification number (ITIN), which is often their Social Security number. You can even pay relatives to take care of your children, as long as they're not: Younger than age 19 when they provided that care, An individual who you or your spouse can claim as a dependent, Someone who was your spouse at any time during the past year, or The parent of your qualifying dependent. Married taxpayers must file a joint return to claim the credit, unless they're considered legally separated or living separate from their spouse — distinctions that would lead the IRS to classify a taxpayer as unmarried. Generally, a couple who files as married filing separately is ineligible for this tax credit, but read IRS Topic No. 602 for more details. Wages, salaries, tips or other forms of pay where federal income taxes are withheld count as earned income, according to the IRS. But this is one of the tricky aspects of this tax credit. The IRS lets taxpayers claim child care expenses that they incurred while looking for work, but if you don't find a job and thus have no earned income for the year, you can't claim the credit. Learn more: Current tax brackets and federal income tax rates How much you receive depends on how much you spent during the year on work-related child care. Taxpayers with one child can claim up to $3,000 of qualifying expenses, while those with two or more children can claim up to $6,000. The credit is worth 20 percent to 35 percent of what you paid for qualifying child care expenses, depending on your income. To qualify for the 35 percent credit — and thus get the maximum $1,050 credit for one child or $2,100 credit for two or more children — taxpayers must have adjusted gross income (AGI) of $15,000 or less. The percentage decreases as AGI increases. Taxpayers with AGI of $43,000 or more receive a tax credit of 20% of qualifying expenses up to $3,000 (or $6,000 for two or more children or dependents). Here's the maximum tax credit for 2024 tax returns, filed in 2025, for two different levels of adjusted gross income: AGI up to $15,000 and AGI of $43,000 or more: Number of children/dependents Maximum expenseto calculate credit % of expenseeligible for creditfor AGI up to $15,000 Max. credit forAGI up to $15,000 % of expenseeligible for creditfor AGI of $43,000+ Max. credit forAGI of $43,000+ One $3,000 35% $1,050 20% $600 Two or more $6,000 35% $2,100 20% $1,200 The more money you make, the smaller the tax credit you'll receive. The 35 percent maximum rate phases out once a taxpayer earns more than $15,000 a year, until it reaches 20 percent when a household makes $43,000 or more in adjusted gross income. That means all taxpayers whose incomes are above that threshold would receive a maximum of $600 in tax credits if they have one child or $1,200 if they have two or more children. Here's how the phase-out works: If your adjusted gross income is… Then the credit is worth thispercentage of qualified expenses: $0 – $15,000 35% $15,000 – $17,000 34% $17,000 – $19,000 33% $19,000 – $21,000 32% $21,000 – $23,000 31% $23,000 – $25,000 30% $25,000 – $27,000 29% $27,000 – $29,000 28% $29,000 – $31,000 27% $31,000 – $33,000 26% $33,000 – $35,000 25% $35,000 – $37,000 24% $37,000 – $39,000 23% $39,000 – $41,000 22% $41,000 – $43,000 21% $43,000 – no limit 20% Some employers let workers contribute funds tax-free to a flexible spending account (FSA) specifically for child care. That money is already getting a tax benefit, and the IRS won't let you double-dip, meaning the FSA funds that you used to cover a work-related child care expense can't count toward the child care tax credit. But you can deduct the difference. Say you spent $11,000 in 2024 on child care for your two children, and you covered $5,000 of those expenses with your FSA funds. You could claim the remaining $6,000 in expenses on your taxes. If your AGI is $43,000 or more, that means a maximum tax credit of $1,200. Taxpayers have to complete Form 2441 and file it with their federal income tax return to claim the child and dependent care tax credit. On Form 2441, the IRS asks for information about qualifying caregivers, including their Social Security or ITIN numbers, their address, whether they work as your household employee and the total amount that you paid them. All of that means you'll want to keep careful track of how much you spent on work-related child care in any given tax year. Most businesses should send you all of the information that you need at the end of the year, but individually employed nannies, relatives or caregivers might not. Even so, tallying for yourself how much you spent can help ensure that you don't leave any money on the table. How long does it take to get your tax refund How bonuses are taxed Gross income vs. net income Sign in to access your portfolio
Telegraph
20-05-2025
- Business
- Telegraph
Is life insurance worth your money?
Life insurance can cost as little as a few pounds a month, which seems a small amount in return for a guaranteed payout for your loved ones when you die. If you pass away within a few years of taking out life cover, then the policy will likely pay out more than you paid in the first place. However, the reverse is true, too: if you live a long life, you could end up paying more than your family will ever receive. But millions of people taking on these odds has given rise to an industry that is now worth more than £65bn. So, is it really worth the money? Not all life cover policies are made equal – and making sure you have one that is well suited to your family, your age and your health is what ultimately determines whether it is worth the cost. Here, Telegraph Money breaks down the different types of life cover and how to tell which policy might be suited for you and your beneficiaries' needs. Who needs life insurance, and what is it? How does life insurance work? Whole of life cover versus fixed term assurance Other types of life insurance policies Should you get multiple life insurance policies? How does a beneficiary make a claim? What happens if I don't have life insurance? Who needs life insurance, and what is it? If you have financial dependents, or have debts including a mortgage, then it is worth considering a life insurance policy, regardless of your age or whether you have any medical issues. Dependents in this case could include a spouse, children or other relatives. The cost of your life cover will depend on a range of factors, but primarily these will be your age, your health and how large you would like the payout to be in the event of your death. Generally, policies become more expensive as you age, and if you are unwell. A life insurance payout could help your family pay for childcare and sustain their lifestyle after your earnings are taken out of the equation. If you are low on cash savings, they could also be a way to pay towards your funeral costs. How does life insurance work? If you take out a life insurance policy, you'll pay a monthly premium that will cover a payout in the event of your death. Depending on the type of policy you choose, these payments may be made indefinitely, or if the insurance is specifically to cover future mortgage payments, for example, the payments and policy will end when your mortgage has been paid off. Whole of life cover versus fixed term assurance There are two main types of life cover – these are 'whole of life', and 'term life'. We outline some of the main differences below: Term life insurance is typically cheaper. This is because a term policy only insures you for a fixed period – for example, 10 or 20 years. You might go for a 'level term' payout, where the lump sum stays the same throughout the life of your policy, which can give extra peace for mind for your family. There's also a 'decreasing term', which means the payout amount will decrease over the course of the policy. The policy will usually end when the payout decreases to zero. It's usually used to pay off debt, such as a mortgage or a large loan, and it should decrease at the same rate as your mortgage debt. 'Increasing term' insurance has a payout that grows over time – it will either grow by the same amount each year, or it may be linked to inflation (often the Retail Price Index). If you're not sure what kind of sum to look for, a general rule of thumb is to look for a payout that is worth 10 times the salary of the highest earner in the household. Whole of life cover is designed to pay out to your family whenever you die. These policies come at a higher price, and are mostly designed for older people. They also tend to be 'guaranteed acceptance', meaning that the payout will go through as long as you keep up with your premium payments. For example, if a 65-year-old man with a standard life expectancy of another 20 years applies for a guaranteed acceptance life cover for £100,000, then the average quote is around £240 a month, according to the wealth manager Evelyn Partners. That would cost around £57,600 over the course of his lifetime. If the same person applied for a cover that did not guarantee acceptance, and instead was medically underwritten – meaning it involves health checks or medicals – it would cost around £200 a month, approximately £48,000 over their lifetime, and still pay out £100,000. Natasha Etherton, of Evelyn Partners, added that relatives of elderly people should be careful about cancelling these policies, especially as they can make up an important part of inheritance tax planning. 'If you happen to take over your mum or dad's finances using a Power of Attorney don't immediately cancel what appears to be expensive life insurance,' she said. 'Look into it first and seek advice, as this may be a further part of your inheritance or may have added benefits attached – such as early payout for long-term care.' Other types of life insurance policies There are several types of life insurance – click through to our dedicated guide which explains them all. These include: Joint life insurance Universal life insurance Over-50s life insurance Critical illness cover. Should you get multiple life insurance policies? There's no legal limit on the number of life insurance policies you can take out, and you might want different policies to cover specific things like your mortgage, and another for more general cover. However, you will end up paying more in premiums, and it might be that one policy can cover everything – just make sure you're aware of what's in the small print, and talk to your provider to make sure the policy covers what you want it to. How does a beneficiary make a claim? If you are a beneficiary of a life insurance policy, the first step is to contact the insurance company as soon as you are able. You will need to provide them with the original or certified copy of the policy holder's death certificate in order for the insurer to begin the claim process. It should take 30 days after they have received all the necessary documents. What happens if I don't have life insurance? There is no requirement to get life insurance. If you don't have one, there will be no payout when you die, but you can still leave money and other things to your heirs from your estate – but they'll have to wait until probate has been completed for your assets to be released.
