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The average national cost for an infant in full-time child care is $9,991 annually, according to ValuePenguin research. Generally, the cost of care goes down as the child gets older, although it can still easily run into the thousands of dollars per year depending on where you live and the specific type of care.
The child and dependent care tax credit which is different from the more familiar child tax credit generally gives parents some help covering the cost of care for children under age 13 or adult dependents. The expanded version, which was enacted as part of the American Rescue Plan Act last March, is for 2021 only and reverts to the previous rules this year.
The general qualifications didn’t change, however. That is, the credit is only available for dependent care provided so that you could go to work or look for work . Generally speaking, you must have earned income during the year to claim the credit.
For your 2021 tax return, the cap on the expenses eligible for the credit is $8,000 for one child or $16,000 for two or more. Additionally, you may be able to write off up to 50% of those expenses, depending on your income . This means you potentially could get a maximum credit of $4,000 for one child and $8,000 for two or more .
“You can’t double dip,” said Dave Alison, president and founding partner of Prosperity Capital Advisors in Cleveland.
Changes To The Child And Dependent Care Credit For 2021
The American Rescue Plan Act made several changes to the child and dependent care credit for the 2021 tax year. First, it made the credit refundable for people who live in the United States for more than half of the year. Using the example above for a non-refundable credit a $500 tax liability and a $600 credit that means you would get the excess $100 back as a refund on your 2021 tax return. The extra credit amount won’t go to waste. This helps lower-income people the most since they’re more likely to lose all or some of the credit’s worth when it’s non-refundable.
There are other changes that increase the potential credit amount for 2021. First, the maximum percentage for 2021 is bumped up from 35% to 50%. More paid expenses are subject to the credit, too. Instead of up to $3,000 in expenses for one child and $6,000 for two or more, the American Rescue Plan Act allows the credit for up to $8,000 in expenses for one child and $16,000 for multiple kids. When combined with the 50% maximum credit percentage, that puts the highest credit amount available for the 2021 tax year at $4,000 if you have just one child and $8,000 for two or more children.
Child And Dependent Care Credit
One of the lesser talked about provisions of the American Rescue Plan Act is the expansion of the Child and Dependent Care Credit. The American Rescue Plan increased and expanded the Child and Dependent Care Tax Credit, making more people eligible and increasing the total credit to $4,000 for one qualifying individual and $8,000 for two or more.
What should I know about the 2021 child and dependent care credit?
- You could be eligible to receive up to 50% back as a tax break or refund for 2021 childcare-related expenses. The amount you’ll be able to claim maxes out at $8,000 for one dependent and $16,000 for two or more.
- It’s limited to the earned income of the parent with the lowest income, i.e. both parents have to earn at least $16,000 to get the maximum credit of $8,000.
- You will need to start gathering receipts and other proof now to make sure you can claim the tax break when you file your income tax return next year.
- In previous years – including tax year 2020 – the maximum amount you could claim for multiple children was $6,000. Under the new law, you’ll be able to claim up to $16,000 in child care expenses for multiple children and up to $8,000 for one child or dependent alone.
Calculate your tax balance based on the 2021 Child Care Credit
What are the income requirements?
Are there special exemption rules for full-time students and people receiving disabilities?
Do I qualify if my spouse or I were unemployed in 2021?
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What Expenses Aren’t Covered
As with the difference between overnight and day camps, not every type of expense is considered valid by the IRS.
- If you send your child to private school, the tax agency notes that you can’t claim that as an expense under the Child and Dependent Care Credit since K-12 tuition is considered an educational expense, not a child care expense.
- Care won’t qualify if it’s provided by relatives who are dependents or spouses. Basically, the IRS is saying that you can’t pay your older teenage child to take care of a younger child, then get a tax credit for that. As for paying your husband or wife to take care of their own child, forget it.
One issue worth noting: If you paid for any child care through a Flexible Spending Account which allows people to set aside pre-tax income to pay for preschool and other kid-related costs you won’t be able to use those expenses to claim this credit. That’s because doing so would allow taxpayers to claim two tax benefits with the money.
Calculating The Child And Dependent Care Credit In 2021
Thanks to the American Rescue Plan Act of 2021, the amounts you can claim for this credit have increased. Starting with your 2021 taxes, youll be able to claim up to:
- $8,000 of expenses for a qualifying person
- $16,000 of expenses for two or more qualifying people
The percent of the expenses you can claim has also increased. You can now claim:
- 50% of expenses if your AGI is below $125,000
- 50%-20%, if your AGI is $125,000-$185,000
- 20%, if your AGI is $185,000-$400,000
- 20%-0%, if your AGI is $400,000-$440,000
- 0%, if your AGI is $440,000 or more
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Qualifications For The Child And Dependent Care Credit
You must meet several criteria to qualify for the child and dependent care credit. To qualify, you must meet all of the following:
- You must have earned income for the tax year.
- You must be the custodial parent or main caretaker of the child or dependent.
- The child or dependent care service must have been used so that you could work or look for employment.
- Your filing status must be single, head of household, qualifying widow or widower with a qualifying child, or married filing jointly.
- Your child or dependent must be under 13 but there is no age requirement if they are disabled and physically or mentally incapable of caring for themselves.
- The childcare provider cannot be your spouse or dependent or the child’s parent.
Child And Dependent Care Credit Information
The American Rescue Plan Act of 2021, was enacted on March 11, 2021, making the Child and Dependent Care credit substantially more generous and potentially refundable only for the tax year 2021, This means an eligible taxpayer can receive this credit even if they owe no federal income tax. Your federal income tax may be reduced by claiming the Credit for Child and Dependent Care expenses on your tax return.
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What If I Worked Part
The IRS says that, generally, parents must be working or looking for work to qualify, but there is wiggle room in some areas.
- Parents are considered to be working during any month when they are a full-time student, according to the IRS.
- Work can be either for an employer or for yourself in your own business or partnership, and it can be either full or part-time. It can also be either in or outside of your home.
One major caveat: Although the credit helps people looking for work, a taxpayer must have had some earned income for the year to qualify for it. So if you looked for work but didn’t find a job , you won’t be able to claim the tax credit.
Purpose Of The Child And Dependent Care Credit
The child and dependent care credit is designed to assist working parents and guardians with some of the expenses involved in raising a child or caring for a disabled dependent. The credit,
- Varies, depending on the taxpayer’s earned income,
- Is based on the expenses paid to provide child or dependent care services so that parents can work, and
- Reduces the amount of federal income taxes due, which can in turn increase your refund. This frees up more money for some of the other expenses involved in raising a child.
TurboTax Tip: For tax year 2022, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is $5,000 .
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There Is An Earned Income Requirement
You must have earned income during 2021 to claim the credit. If you are married and filing a joint return, your spouse must have earned income as well.
Earned income generally includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. For more information on what qualifies as earned income, visit this IRS website.
Who Qualifies For The Child And Dependent Care Tax Credit
There is a range of criteria that must be fulfilled to become eligible to claim this tax credit. You must meet the requirements detailed below to claim the Child and Dependent Care Credit on this years income tax return:
- You must have earned income. For example, if youre then either you or your spouse must have a form of earned income.
- You must be the parent or the primary caregiver of the dependent claimed.
- The services must have been purchased to either work or search for employment.
- A qualifying child under age 13. The child or dependent must either be disabled or under the age of 13 to be claimed as a dependent for this tax credit.
- The provider of any childcare cant be a dependent, your spouse, or a parent of the child, even if youre paying them a salary.
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What Common Mistakes Do People Make When Claiming The Child And Dependent Care Credit
One thing thatâs easy to overlook is getting a tax identification number of the organization or person who provided the care. This can be either the employer identification number or Social Security number of the organization or person providing the care. You need to enter this on your tax return to receive the benefit.
People who receive dependent care benefits, such as making contributions to a dependent care plan through their employer on a pre-tax basis, will need to complete part III of Form 2441. However, this could result in receiving less or no credit, Curry-Edwards said.
A common misconception taxpayers have is that a noncustodial parent may claim dependent care expenses on Form 2441, says Caruso. Generally, the IRS determines a custodial parent as someone with whom the child spends the most nights throughout the year, whereas the other parent would be considered a noncustodial parentâand they arenât able to claim this credit.
The Child and Dependent Care Credit is complicated, and it can confuse a lot of taxpayers. âThese credits can become complicated, and taxpayers should seek the guidance of tax professionals to avoid errors and potential assessments of penalties,â Caruso advises.
What Counts As A Child Care
The IRS considers most types of paid child care eligible for the credit. Qualified expenses for day care, babysitters, nannies, and domestic workers who provide child care in the scope of their duties all count. You can even claim the credit for expenses paid for day camps and summer camps, even if the camp is centered around an activity or sport, as long as the camps provided care while you and/or your spouse were working or looking for work.
Preschool expenses also count toward the tax credit. According to TurboTax, expenses related to preschool, nursery school, and other pre-kindergarten programs that can otherwise be considered day care are eligible for the credit.
Expenses related to kindergarten and schooling beyond that do not count for the credit. However, before- and after-school care costs do qualify, as do expenses related to a nurse or other care provider for a qualified disabled dependent. Overnight camps are not considered qualified expenses.
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Childcare Services Provided By A Relative
Costs for child care services provided by a person 18 or over who is related to you are eligible as child care expenses, as long as you or another person did not claim a tax credit for that person in the following categories of the personal tax return:
|line 30500 – amount for an eligible dependent|
|line 30450 – amount for infirm dependents age 18 or over|
|line 30500 – caregiver amount|
See the CanadaCaregiver Credit article re the above tax credits
Who Is Eligible To Claim The Credit
You may be eligible to claim the child and dependent care credit if:
- You paid expenses for the care of a qualifying individual to enable you to work or actively look for work.
- You lived in the United States for more than half of the year. However, special rules apply to military personnel stationed outside of the United States.
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More Help With Claiming The Child Care Tax Credit
If you think you qualify for the Child Care Tax Credit or other tax credits or deductions, get help! With many ways to file your taxes with H& R Block, we can work with you in a way that best suits your needs to help maximize your tax credits and deductions.
Donating household goods to your favorite charity? Learn the ins and outs of deducting noncash charitable contributions on your taxes with the experts at H& R Block.
What Are Child Care Expenses
If you have children and pay for them to be looked after, you may be able to claim a deduction for these child care expenses when you file your tax return.
This is different to receiving a tax-free monthly payment like the Canada Child Benefit Opens in a new window and other government benefits, although these can also help with the cost of raising a family.Opens in a new window
You could claim child care expenses as long as you paid them to do 1 of the following:
Earn income through an employer
Attend school under conditions outlined in the governments Educational programOpens a new website in a new window – Opens in a new window
Carry out research or similar work thats been funded by a grant
Eligible taxpayers can claim up to $8,000 per eligible child under the age of 7 at the end of the year, and $5,000 per eligible child aged 7 to 16 at the end of the year.
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Who Can Claim The Tax Credit
To qualify for a tax credit on your day care expenses, you have to meet four sets of criteria set by the IRS.
You must have earned income from employment, such as wages or salary from a job. If youre married and filing jointly with your spouse, your spouse must also have earned income. Self-employment counts, and full-time students and people who are disabled are exempt from this requirement.
Your adjusted gross income cannot exceed $440,000 for the 2021 tax year.
You must have a filing status of Single, Married Filing Jointly, Head of Household, or Qualifying Widow or Widower with a Qualified Dependent. Married Filing Separately filing status does not qualify for the credit.
You must have paid for care in order for you and your spouse to be able to work, look for work, attend school, or if you are disabled.
Some parents may not realize theyre able to claim the credit because of the nature of their work. Mary Beth Foster is a freelance writer in North Carolina. Initially, she and her husband were unsure if they qualified because of her self-employment status.
Because of the freelance nature of my work, he wasnt sure writing at Starbucks sometimes counted, she said.
But a little research on their part assured them they met the requirements.
We figured we ended up saving the few hundred dollars I owed in taxes for my freelance writing since they werent taken out of my checks, Foster said.
More Than Just Child Care
As the name suggests, the child and dependent care credit isn’t just for childcare. It covers expenses for the care of other people, too. In addition to expenses for the care of a child under the age of 13, the credit is available for expenses to care for:
A person who can’t dress, clean, or feed themselves because of physical or mental problems is considered to be unable to care for themselves. A person who must have constant attention to prevent them from injuring themselves or others is also considered not able to care for themselves.
Also note that the American Rescue Plan Act also made enhancements to the dependent care aspects of the 2021 credit. Under the law, employers could increase the maximum amount that could be excluded from an employee’s income through a dependent care assistance program. For 2021, the maximum amount was increased from $5,000 to $10,500 .
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