Childcare in California is among the most expensive in the United States. Fortunately, having children can provide you with a tax benefit.
California has the fourth most expensive child care system in the United States, according to the U.S. Department of Labor’s National Database of Childcare Prices 2016-2018. The estimated median annual cost for 2023 is $12,901, covering center and home-based care for infants, toddlers, preschool, and school-age children.
California lags behind New York, Hawaii, and Massachusetts in terms of average income. Data for Colorado, Indiana, New Mexico, and Washington D.C. was not included in the report.
There are two tax credits that you might find helpful when it comes to saving money on your federal taxes: the earned income tax credit and the child and dependent care credit. In California, the young child tax credit presents a valuable opportunity for potential savings.
Remember: tax credits reduce the amount of tax that you owe, while deductions reduce your taxable income.
Child tax credit
Here’s how you know if your child qualifies for the federal credit. They must:
- Be under age 17 at the end of the year
- Be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (such as a grandchild, niece or nephew)
- Provide no more than half of their own financial support during the year
- Have lived with you for more than half the year
- Be properly claimed as your dependent on your tax return
- Not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid
If your income falls below $200,000 (or $400,000 for joint filers), you may be eligible to receive the entire $2,000 per child as part of the 2023 child tax credit. Each child can receive a refundable credit worth up to $1,600. According to the IRS, individuals who earn more may be eligible to claim a partial credit.
Child and dependent care credit
According to the IRS, individuals may be eligible for the child and dependent care tax credit if they have paid someone to care for their child in order to work or search for employment, both for themselves and their spouse if filing jointly.
Residency requirements typically involve spending a significant portion of the year in the country, although there are exceptions for military personnel.
The calculation is based on your income and the percentage of your expenses for care that enable you to work, search for employment, or attend school.
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Young child tax credit
According to the Franchise Tax Board, California residents who qualify for the young child tax credit may be eligible for a credit of up to $1,117.
In order to be eligible for the California earned income tax credit, you must meet certain requirements. One of these requirements is having a qualifying child who is under 6 years old by the end of the tax year.
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