If you’re a parent, you most likely benefited from the stimulus checks this year. There’s no guarantee, however, that these will continue into 2022. Thankfully, there is a new child and dependent care tax credit for 2021 that can put substantial money back into your pockets if you qualify. Some families may be eligible to claim up to $16,000 in childcare costs. To take advantage of this tax credit, verify your eligibility and follow our helpful tips for claiming it on your return next year.
The Child and Dependent Care Tax Credit – What’s Changed?
The child and dependent care tax credit helps working parents afford the cost of childcare. Under the American Rescue Plan Act (ARPA) of 2021, allowable expenses have increased from $3,000 to $8,000 for one child. For two or more children, the amount has jumped from $6,000 to $16,000. Additionally, the reimbursement percentage for employment-related child and dependent care expenses has increased from 35 percent to 50 percent, making the maximum tax credit $4,000 for one child or $8,000 for two or more. For 2020, the maximum tax credit is $1,050 for one child or $2,100 if you have two or more.
For 2021, the child and dependent care tax credit is also fully refundable. This means that families with little to no tax liability will see larger tax refunds next year. The tax credit does phase down for families with income levels above $125,000 (previously phaseout started at $15,000). If you earn between $125,000 and $185,000, the credit is reduced by 1 percent for every $2,000 over $125,000 to a minimum of 20 percent. Those earning between $185,000 and $400,000 receive a flat 20 percent credit. For income levels greater than $400,000, the credit is gradually reduced from 20 percent to zero. If you earn more than $440,000, you do not qualify for the tax credit.
Who Qualifies as a Child or Dependent?
Under the child and dependent care tax credit, the IRS considers the following to be a qualifying individual:
- Your dependent child who was 12 or younger at the end of the tax year
- A spouse who is physically or mentally incapable of self-care and lived with you for more than half of the year
- Any other person claimed as a dependent on your return who is physically or mentally incapable of self-care and lived with you for 6 months or longer during the year
Additionally, the qualifying individual must have a tax identification number, such as a Social Security number.
What Expenses Are Covered or Excluded?
Child and dependent care expenses must be work-related to qualify for the tax credit. This means that the expense must allow you to work or look for work, or attend school full-time if married. Typically, the following expenses are covered under the tax credit:
- Childcare outside of the home (if the qualifying individual regularly spends at least eight hours a day in your home)
- Dependent-care centers
- In-home care, such as a babysitter or nanny
- Gross wages paid for qualified services, plus your portion of employment (Social Security, Medicare, unemployment) and payroll taxes
- Meals and/or lodging for an employee providing child and dependent care
- Day camp fees (if enrolled while working or looking for work)
- Before- and after-school care programs (if enrolled while working or looking for work)
Expenses that generally do not qualify for reimbursement include, but are not limited to:
- Travel/transportation costs to and from childcare or dependent-care facility
- Overnight camp fees
- Education costs (a portion of boarding school costs may be eligible if the dependent is enrolled to allow you to work or look for work)
- Chauffeur or gardening services
- Babysitter fees for hours outside of your work schedule or job search
Although you can claim childcare and dependent-care expenses paid to relatives who aren’t your dependents, you may not claim any payments made to:
- Your children who are 18 or younger
- Any person you can claim as a dependent
- Your spouse
- The parent of your qualifying individual if the qualifying individual is your child and is 12 or younger
Other Child and Dependent Care Tax Credit Requirements
To take the child and dependent care tax credit, you must have earned income and file a tax return. If married, both you and your spouse must have earned income, unless one of you is disabled, receiving unemployment benefits, or a full-time student. You must also file a joint return unless you are legally separated or divorced.
The expense amount you claim cannot be more than your earned income for the tax year if you are single. For those who are married, expenses cannot exceed the smaller of your or your spouse’s earned income at the end of the tax year. For example, if you earned $18,000 and your spouse earned $5,000, you cannot claim more than $5,000 in qualifying expenses when figuring your tax credit.
Be sure to keep receipts and detailed records of your 2021 qualifying expenses. You will also need the name, address, and TIN (either Social Security number or employer identification number) of any care provider. You can use Form W-10, Dependent Care Provider’s Identification and Certification, to request this information for your tax return.
If you qualify for the tax credit, you will need to complete Form 2441, Child and Dependent Care Expenses, and attach it to your 2021 individual tax return. Don’t forget to include any employer-paid dependent care benefits on Part III of the form.