Dependent, Child Care Expenses Tax Credit
Attention: Find important information regarding the 2021 Child and Dependent Care Credit (CDCC). This credit was greatly changed as part of the third stimulus bill or American Rescue Plan Act. This does not apply for 2022 and future taxes.
Paying for childcare and dependent care can be very expensive! Fortunately, there is a tax credit to help defray the costs. If you had to pay someone to care for your child, dependent, or spouse so you could work, look for work, go to school, or because of a disability, then the Child and Dependent Care Credit may be for you. Note: this tax credit is not the same as the Child Tax Credit.
Tax Credit for Dependent, Child Care
You will generally qualify for the Child and Dependent Care Tax Credit if you meet all of the following conditions:
- You must have earned income, such as wages from a job. If you are married and filing a joint tax return, your spouse must also have earned income.
- Your filing status is Single, Married Filing Jointly, Head of Household, or Qualifying Widow(er) with a Dependent Child.
- You (and your spouse if married filing jointly) earned income from employment or self-employment. You are exempt from this requirement if you were a full-time student or disabled.
- You paid someone to provide care for a qualifying person and the care provider was not someone you could claim as a dependent, the parent of your qualifying person, your spouse, or your child under the age of 19 (regardless of whether they are a dependent).
- You had to pay for child or dependent care so that you (and your spouse if married filing jointly) could work, seek employment, attend school, or if you were disabled.
- Note: The cost of sending kids to day camp in the summer counts toward the Child and Dependent Care Credit; overnight camps don't count.
Start the Child or Dependent Care Credit Calculator
Who Is a qualifying person?
A qualifying person for the Child and Dependent Care Credit can be either of the following:
- Any child who is your dependent and was under age 13 when the care was provided, or
- Your spouse or dependent age 13 or over, if physically or mentally incapable of caring for themselves.
In addition, the qualifying person must have lived with you for more than half of the year. There are exceptions for a qualifying person who was born or died during the year and for a child of divorced or separated parents.
Child and Dependent Care Credit Value
The Childcare Credit value is adjusted each year for inflation. Its value dependents on your income, filing status, amount of dependents, and the amount you spend on childcare expenses so you can work or look for work.
- The Child and Dependent Care Credit can be worth from 20% to 35% of some or all of the dependent care expenses you paid. The percentage you use depends on your income. If your income is below $15,000, you will qualify for the full 35%. The percentage falls by 1% for every additional $2,000 of income until it reaches 20% (for an income of $43,000 or more).
- The 20%-35% is taken from up to $3,000 of expenses paid for one qualifying person, or from up to $6,000 of expenses paid for two or more qualifying persons. Therefore, the maximum CDCC is worth $2,100 (based on 2 or more dependents and $6,000 or more of qualifying expenses).
- Before figuring the credit, you must reduce your qualifying expenses by any amount of child or dependent care benefits that were provided by your employer and that you deducted or excluded from your income. On Taxpert.com, we will help you calculate this. Dependent care assistance from an employer does not count towards this credit because it already reduces your taxable income. Currently, taxpayers can exclude a maximum amount of $5,000 or $2,500 if filing single or separate from their income as it is reported on the W-2 they receive.
- The Child and Dependent Care Credit is not refundable, so it is not worth anything if you owe no income tax.
Learn more in Child and Dependent Care Expenses in Publication 502.
The Child and Dependent Care Credit in 2021
As part of the American Rescue Plan Act passed in 2021, this tax credit was greatly enhanced for Tax Year 2021 only. If you paid for childcare during 2021, you should claim this as one credit on your 2021 Tax Return. Each year, keep detailed record of your dependent care expenses as they will be needed when you file your return.
The 2021 plan approved a maximum, fully refundable tax credit on the amount up to $8,000 towards paying for childcare. As a refundable tax credit, this means you will receive the amount even if you do not owe tax. In short, the IRS is paying half of these expenses up to a maximum of $8,000 per child, where the taxpayer pays $8,000 during the year and receives half of it back as a tax refund. The credit also covers up to $16,000 for two or more children; the taxpayer pays up to $16,000 in qualifying childcare expenses and receives half of it back as a refund. This means the maximum credit is $4,000 for taxpayers with one dependent and $8,000 for those with two or more for whom they are making qualified payments for.
The credit amount begins to phase out or decrease when the taxpayer or household income reaches $125,000. The credit is decreased by 50% for any amount between $125,000 and $183,000, where it is phased out to 20%. This 20% lasts until the income reaches a maximum of $400,000. Any amounts from $438,000 and above will reduce the credit to $0.
Example 1: You are a single taxpayer with two dependents for whom you pay daycare expenses so you can work totaling $14,000 for Tax Year 2021. You have an Adjusted Gross Income or AGI of $80,000, so you do not reach the phaseout threshold and can claim the full credit. Since you have two dependents, you qualify for up to $16,000 instead of $8,000. On your tax return, you will be able to claim a credit for half of your childcare expenses, totaling a refundable credit of $7,000.
Example 2: You and your spouse file a 2021 joint return, including your one dependent child. You make a combined income of $120,000, under the threshold, and pay $9,000 in childcare expenses so you can work. The IRS will refund you half of this, but only up to $8,000 since you have one dependent. On your tax return, you will see a credit of $4,000 to go towards the $9,000 you paid.
Additionally, if your employer provides dependent care assistance on your W-2, then you will be able to exclude a maximum amount of $10,500 or $5,250 if single or separate, up from $5,000 and $2,500 respectively from 2020, from your taxable income on your 2021 Tax Return. This is calculated for you when reported on Taxpert.com - this is only for Tax Year 2021.
Other changes included:
- Advance payments of the child tax credit in 2021.
- 2021 contribution changes to flexible spending arrangements or FSAs.
When you prepare and file your 2022 Return on Taxpert.com in 2023, we will calculate the allowable credit you are entitled to based on your tax information, not including the 2021 changes as they no longer apply.
How to Claim the Dependent, Child Care Tax Credit
Taxpert.com makes it easy for you to claim the CDCC on your tax return. Once you enter your childcare expenses for your dependent, we will prepare the appropriate form for you and your completed return will then include Form 2441, Child and Dependent Care Expenses.
When you provide the information for the credit, you must include the Social Security Number (SSN) of each qualifying person in order to claim the credit. Additionally, provide the name, address, and taxpayer identification number of your child or dependent care provider.
If you cannot obtain or are missing the social security number or other taxpayer identifying number of a child care provider, you can still claim the credit by demonstrating "due diligence" in attempting to get this information. Or, if a provider of childcare refuses to give you the identifying information, you can still claim the credit. If you need special instructions for this when preparing your return on Taxpert.com, contact us and we can assist you.
Did Somebody Claim Your Dependent?
A qualifying person for the Child and Dependent Care Credit may only be claimed on one tax return. If a dependent is claimed on more than one tax return (for example, a child is claimed by both divorced parents), then the IRS will apply a set of tiebreaker rules to see who gets to claim the dependent.
See what other tax credits and tax deductions may be available to you.
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