Most American families with children are familiar with the federal child tax credit, as the parents of more than 60 million children received enhanced payments in 2021. But there is another tax benefit for parents that is perhaps less well known than the CLC, but which can be much more generous, offering up to $8,000 in tax credits this year.
The child and dependent care credit has been boosted by the 2021 US bailout, with the pandemic relief bill increasing the amount parents can claim on their tax returns for childcare costs and making it fully refundable. The latter is important because if the tax credit exceeds what you owe the IRS, you will get the difference in your tax refund.
The Child Care and Dependent Care Credit isn’t new – it’s been around since the 1970s and was designed to help working parents offset the cost of daycare, after-school programs and summer camps. ‘summer. But the credit hadn’t kept pace with childcare costs, with child advocacy group First Five Years Fund noting in 2018 that it covered only around 10% of the typical annual cost of caring for two. children in the United States at the time.
The US bailout has created several tax advantages for families. That includes a generous expansion of the Child Care and Dependent Care Credit, which the Biden administration said was intended to help parents get back to work. Under the expansion, parents can receive a tax credit worth up to $8,000, nearly four times the previous limit of $2,100.
The expanded child tax credit, by comparison, provides $3,600 for each child under six and $3,000 for children ages 6 to 17.
“They recognize the rising cost of child care in our country,” said Robbin Caruso, co-head of Prager Metis’ national tax controversy practice. “This is a huge opportunity for taxpayers, and it shouldn’t be missed.”
The fact that it is also fully refundable is important because it could increase the tax refund many parents receive this year, experts say. Tax credits are dollar-for-dollar reductions in a person’s tax liability, as opposed to deductions which reduce a person’s overall taxable income.
This means that tax credits like the Child and Dependent Care Credit are more valuable to taxpayers than deductions – and become even more so when fully refundable.
How can I get $8,000?
The maximum parents can receive from the tax credit is $8,000, which applies to families with two or more children.
The expanded tax relief allows families to claim a credit equal to 50% of their child care expenses, which can reach $16,000 for two or more children. In other words, families with two children who spent at least $16,000 on child care in 2021 can recoup $8,000 from the IRS through the expanded tax credit.
Prior to the American Rescue Plan, parents could only claim 35% of up to $6,000 in child care expenses for two children, or a maximum tax credit of $2,100.
Parents of a child can claim 50% of their child care expenses, up to $8,000. That means parents with one child can get a maximum tax credit of $4,000 on their taxes this year. (Before the US bailout, the limit for parents with one child was $1,050 via the tax credit.)
Many parents “may not realize how much it’s grown,” said Lisa Greene-Lewis, CPA and tax expert at TurboTax, of the child and dependent care credit.
Who is eligible?
Parents and people with dependents who paid for the care of an eligible person in order to work or seek work in 2021 are eligible for the expanded tax credit.
According to the IRS, a qualified person can mean several things:
- A child under the age of 13 who is your dependent.
- A spouse or dependent of any age who cannot care for themselves and who lives with you for more than six months of the year.
The latter is important because it extends the benefit to people caring for disabled older or adult children, as well as, for example, taxpayers who claim elderly parents as dependents and pay for their care.
“If you have a child with a disability, there’s no age limit,” Greene-Lewis said.
There are also certain income limits on the tax credit, similar to the child tax credit and stimulus checks. Credit percentages are reduced by 1 percentage point for every $2,000 of adjusted gross income for people earning more than $125,000. This means that someone with an income of $127,000 could claim 49% of their child care expenses, for example.
Families earning more than $183,000 are capped at 20% of their child care costs. But the credit is completely eliminated for families earning more than $428,000.
What expenses are considered valid?
Since the Child and Dependent Care Credit is intended to help workers pay for child care, parents must have spent money to care for their children or dependents so that they can work or look for work. People who pay for the care of elderly dependents can claim expenses such as adult day care.
- Care can be provided inside or outside the home, ranging from nannies to child care. But the IRS requires parents to provide the provider’s name along with their Social Security number or EIN, as well as check a box to indicate whether they are a household employee. (You can see the form to claim the tax credit here.)
- Day camps are eligible, but overnight camps are not eligible since these are not necessary for a parent to work or seek work.
- Before and after school programs are also considered eligible because they are considered child care expenses, the IRS notes.
- Care provided by a loved one who is not dependent on you may be considered an expense.
“It can count for summer camp, sports camps — as long as it gets you working or looking to work,” Greene-Lewis noted.
What expenses are not covered?
As with the difference between overnight and day camps, not all types of expenses are considered valid by the IRS.
- If you send your child to a private school, the tax agency notes that you cannot claim this as an expense under the Child and Dependent Care Credit, because kindergarten tuition in grade 12 are considered education costs and not child care costs. (However, as noted above, both before and after school programs are eligible, according to the IRS.)
- Care will not be eligible if provided by parents who are dependents or spouses. Basically, the IRS says you can’t pay your older teenager to care for a younger child and then get a tax credit for it. As for paying your husband or wife to take care of their own child, forget it.
What if I work part-time, study or work from home?
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 working any month when they are full-time students, according to the IRS.
- The work can either be for an employer or for yourself in your own business or partnership, and it can be full-time or part-time. It can also be inside or outside your home.
A major caveat: while the credit helps job seekers, a taxpayer must have earned income for the year to qualify. Thus, if you have looked for work but have not found a job (and therefore had no income in 2021), you will not be able to claim the tax credit.
What will happen to the tax credit next year?
Like many provisions of the U.S. bailout, the expanded child and dependent care credit is only valid for the 2021 tax year — the year people are now filing tax returns for. income.
For 2022, the tax credit returns to its previous form. This means that when parents claim the tax credit on their returns next year, the benefit will be reduced to the previous maximum of $2,100.