Child care can be a significant expense. The expanded child care credit for 2021 can reimburse you for 50%.

Sarah Tew / CNET

A new year means a new tax season ahead – and there are big changes in the child care and dependent care credit this could result in a significant increase in your tax refund. The child care and dependent care credit allows you to deduct child care or dependent care expenses as a direct reduction of the amount of federal tax you owe. The credit applies to expenses for child care, child care or transportation related to the care of children or dependents.

Thanks to a single credit extension in the American Rescue Plan Act, parents who paid for child care in 2021 are eligible to receive up to 50% of their child care expenses in the form of tax relief or reimbursement. The amount of the tax credit that you can claim is $ 8,000 for one dependent and $ 16,000 for two or more people. The trap ? You will need all of your receipts and other monetary evidence to make sure you can claim the tax break when you file your tax return.

We will explain how this tax credit for child care works below. This story was recently updated.

What is the child care and dependent care credit?

The Child Care and Dependents Credit is a tax relief designed to allow parents to deduct child care expenses. For example, if you paid for child care while you were working, that expense may be claimed as a credit when you file your taxes this year.

How is the child care credit different from 2021 taxes? In previous years, the maximum amount you could claim was $ 3,000 for one child or $ 6,000 for two or more. For 2021 expenses, you can claim up to $ 8,000 for one child or dependent and up to $ 16,000 for multiple children. The one-time child care credit increase for 2021 also increases the maximum rate of return for child care expenses from 35% to 50%.

What does it mean? In short, for the 2021 tax year, you could recover up to $ 4,000 for one child and $ 8,000 for custody of two or more.

Prior to the American Rescue Plan, the Child and Dependent Credit was non-refundable, meaning it could reduce your tax bill to zero but you wouldn’t receive a refund on anything more. . Now, the credit is fully refundable, which means that you will receive money for it even if you don’t owe taxes.


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What counts as an eligible expense for the child care credit?

The law defines the expenses according to the care of the children suppliers, but there is room for maneuver that also takes into account expenses such as transport. Any organization or person who cares for your dependent counts as long as you pay them. (For example, an unpaid spouse or parent does not count.)

The IRS has relatively relaxed rules about caregivers, according to Elaine Maag, senior research associate at the Urban Institute. However, you are likely to be more likely to claim child care credits for people and groups operating in an official capacity, such as preschools and daycares, as opposed to the $ 40 you paid a teenager for. babysit your child for an afternoon.

Qualified care providers

What qualifies

What is not admissible

Care expenses

Your partner

Before and after school care programs

The dependent’s parent

Day camp

Your children

Transport to and from healthcare providers

Babysitters paid “under the table” *

Babysitters, nannies, housekeepers

* Parents who pay their babysitters in cash “in the dark” should be aware that it is risky to claim the child care tax credit since the income may not be claimed or documented by the provider.

How do I deduct child care expenses from my taxes?

Make sure you have a detailed account of all child care expenses – especially any receipts you received from daycares or after-school programs showing your expenses. When tax day approaches, fill out Form 2441 and tie it to your Form 1040 tax return.

According to the IRS, you will need to report the name, address and “Taxpayer Identification Number” or TIN (this can be a Social Security number or Employer Identification Number) provider on your declaration. You can use Form W-10 to get the information you need from your healthcare provider.

Note that the Child Care and Dependents Credit Form is built into tax software such as TurboTax and H&R Block. These programs will ask you if you have a child under 13 and paid child care expenses during the year in order to calculate your child care credit.

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You will need itemized expense statements and receipts to apply for the child care credit.

Sarah Tew / CNET

What is the maximum amount I can claim for child care expenses?

For expenses accrued in 2021, the IRS says you can deduct up to $ 8,000 of eligible expenses for one dependent or up to $ 16,000 of eligible expenses for multiple dependents.

Remember that the child and dependents tax credit is not the same as the child tax credit of the same name. Advance child tax credit payments were paid on a monthly basis last year. If you are eligible for the child tax credit and have not received advance payments, you can receive between $ 500 and $ 3,600 per child as a credit when you file your income tax return.

Does my income affect the amount I can claim or recover?

To be eligible for the child care credit, a filer must have earned income, such as wages from employment or unemployment. If you are married and file a joint income tax return, your spouse must also have earned income. (Exemptions apply full-time students and people receiving disability benefits.) The IRS says that in general, you can not take child care credit if you are married and file separately.

The maximum amount of eligible child care expenses – $ 8,000 for one child or $ 16,000 for two or more – is not affected by income level. However, the rate of return on the child care credit declines as income increases.

For the 2021 tax year, the credit rate begins to decrease when the income of a taxpayer or an AGI household (adjusted gross income) reaches $ 125,000. The credit rate is reduced by 1% for every $ 2,000 earned over $ 125,000, up to $ 183,000, where it stands at 20% for anyone earning between $ 183,001 and $ 400,000. For example, an AGI of $ 145,000 would benefit from a 40% tax credit rate.

For those who earn over $ 400,000. the credit rate decreases again by 1% for each $ 2,000 earned over $ 400,000, and becomes zero for families of $ 438,000 or more. For example, an AGI of $ 410,000 would benefit from a tax credit rate of 15%.

Which dependents are eligible for the child care credit?

According to the IRS, the eligibility rules for dependents are quite broad, but a dependent must meet one of the following criteria:

  • Be under the age of 13, or
  • Being unable to care for themselves if you are 13 years of age or older (for example, if you have an older spouse or dependent who is disabled and unable to care for themselves, and who has lived with you for more than half of the year, or
  • Being physically or mentally unable to take care of yourself, even if your income was $ 4,300 or more.

In addition, the eligible dependent must have a tax identification number, such as a Social Security number.

What should I know if I am separated or divorced?

Only the custodial parent can claim the child care credit on their taxes. The IRS defines a custodial parent as the parent with whom the child lived the most nights in 2021. The rules for separated or divorced parents are similar to those for child and shared custody tax credit.