American families pay between $8,000 and $10,000 per child for annual child care costs, a 2021 Treasury report found, citing data from the Child Care Aware of America. But this year, parents and other qualifying caretakers can get a big tax break on care costs.
The Child and Dependent Care Credit, a tax credit for parents and other caregivers with qualifying dependents, was expanded by more than double thanks to 2021’s American Rescue Plan. This is similar to the expanded Child Tax Credit under the American Rescue Plan, which was also a temporary expansion for tax year 2021.
The expanded Child and Dependent Care Credit allows eligible taxpayers to claim a credit worth up to $4,000 in care expenses paid for one qualifying dependent or $8,000 for two or more dependents.
Here’s what you need to know about the expanded credit, eligibility, and how to claim it on this year’s tax return.
What is the Expanded Child and Dependent Care Credit?
The Child and Dependent Care Credit is a tax credit for the expenses you paid for the care of a dependent — such as a babysitter or daycare — which allowed you to work, look for work, or attend school.
This year, you can claim up to $8,000 in expenses paid for one dependent or $16,000 in expenses for two or more dependents, and get a credit worth up to 50% of those expenses. The credit begins to phase out after you reach an adjusted gross income (AGI) of $125,000, and those with an AGI over $438,000 are ineligible.
Previously, the Child and Dependent Care Credit allowed taxpayers with dependents to claim up to $3,000 in care expenses for one qualifying dependent and $6,000 for two or more dependents. And instead of receiving up to 50% back, you could get up to a 35% return on care expenses — up to $1,050 for one dependent and up to $2,100 for two or more dependents.
Another big difference with the expanded credit is that it’s refundable for the first time, says Duke Alexander Moore, an enrolled agent and founder of Duke Tax Online. A nonrefundable credit, like the Child and Dependent Care Credit was before, only subtracts from your tax liability. That means if you owe less in taxes than the credit is worth, you may not get the full amount you qualify for. You can receive the full refundable credit, on the other hand, even if the credit is worth more than you owe — you’ll receive the remainder as a refund.
Who is Eligible for the Child and Dependent Care Credit?
There are a few criteria you must meet to claim the Child and Dependent Care Credit. First, the credit is specifically for dependent care expenses you paid so you could work, look for work, or attend school. As a result, you must have received earned income. There are some exceptions, such as if you were a full time student. However, other forms of income (such as child support or unemployment benefits) do not count, according to Moore.
And if you’re married filing jointly, both spouses must have earned income. If one spouse is working, but the other spouse is not working, not looking for work, and not going to school at least half the time, you won’t be eligible, says Joshua Giminez, a certified public accountant and founder of Fair Winds Tax & Financial in Columbus, OH.
To claim the credit, you should also have a qualifying dependent for whom you paid care expenses. The IRS defines a qualifying dependent as:
- Someone under the age of 13 who you can claim as a dependent.
- A spouse who is unable to care for himself or herself, and lived with you for over half of the year.
- Someone who is unable to care for himself or herself and who you can claim as a dependent.
- Someone who is unable to care for himself or herself and who you could claim as a dependent, except they had an income over $4,300.
- Someone who is unable to care for himself or herself and who you could claim as a dependent, except they filed a joint return.
- Someone who is unable to care for himself or herself and who you could claim as a dependent, except you, also, can be claimed as a dependent on someone else’s return.
You can use the IRS’ Interactive Tax Assistant to see if your dependent qualifies before filing. You’ll need your dependent’s birthday and your filing status to check.
The IRS also has guidelines for the types of care that qualify under the credit. Qualifying services can be inside or outside of your home, but child support payments do not qualify.
If you or your spouse cared for your child, you won’t be able to claim the credit, Moore says. You also won’t qualify if you have another dependent, like an older sibling, who cares for the qualifying dependent.
And remember, the credit is for dependent care expenses paid so you could work, look for work or attend school. That means expenses for care while you were doing volunteer work or non-work-related events — like dinner or running errands — don’t count.
Types of qualifying care services include:
- After-school care
- Assistance for activities of daily living — such as eating and helping with personal hygiene
- Nanny or nanny-share arrangements
Here are a few examples of qualifying expenses:
- You and your spouse work, and you pay for care for your 4-year-old for the hours you both are working.
- You are actively looking for work for only three months of the year, and paying for dependent care during this time. You qualify for the expenses paid during this time.
- You work three days a week, but pay for your 7-year-old to have five days of child care. You qualify for expenses paid for the three days per week that you work.
You may be able to claim child care expenses from 2020 that you paid for in 2021. The credit operates on a cash-basis, meaning that any care services that were paid in 2021 may qualify for the Child and Dependent Care Credit.
How Much Can You Expect from the Child and Dependent Care Credit?
The credit is based on your income and a percentage of the care expenses you paid in 2021. This year, you can claim up to $8,000 paid in care expenses for one qualifying dependent, or up to $16,000 for two or more.
If you qualify for the full credit, which is equal to 50% of your qualifying expenses, that means you can get up to $4,000 for one qualifying dependent, and up to $8,000 for two or more qualifying dependents on your tax refund.
But the credit starts to phase out after you reach an adjusted gross income of $125,000. For every $2,000 over an AGI of $125,000, the credit amount decreases by 1%. For example, if your AGI is between $125,000 and $127,000, you can claim 49% of your qualifying expenses. If your AGI is $180,000, you can claim 22% of your qualifying expenses. If your AGI is over $438,000, you won’t be eligible for the credit at all.
Here’s the complete phaseout schedule for the Child and Dependent Care credit from the IRS
How Can You Claim the Child and Dependent Care Credit?
You can claim the Child and Dependent Care Credit by including Form 2441 with your tax return.
You’ll need the Taxpayer Identification Number or Social Security number for each qualifying dependent, as well as the name, address, and TIN or Employee Identification Number for the person or organization caring for your dependent. Moore says you can find this information using the Dependent Care Provider’s Identification and Certification Form, also known as a W-10. If your care provider’s information is incorrect or incomplete, your credit may be denied, the IRS says.
You should also keep a copy of all documents related to dependent care expenses on hand while filing, including payment receipts.
If you’re self-filing with tax software this year, make sure you attach Form 2411 and the W-10 form to your return. When you file with a tax prep software or work with your tax preparer, look for questions about qualifying dependent care and make sure the form — and your accurate information — is included on your return before submitting to avoid delays.