If you paid for someone to take care of your child, you might be eligible to claim a child care tax credit called Child and Dependent Care Credit.
This program has been in place for years, but for 2021, as part of the American Rescue Plan, which was signed into law on March 11, 2, 2021, the IRS has made changes to the amount you can claim as credit and the qualifications of those who will claim.
Listed below is the information that you need to know if you will avail of the child care credit this 2021 (2022 tax filing).
Note: Brightside Ohio is not a tax service provider. To know more about tax credits the government offers, contact your tax professionals.
Summary: Child and Dependent Care Credit
- If you paid for child care, or you paid someone to take care of your child so you can work, look for work, or study full time, you can qualify.
- The amount must be paid to licensed daycare providers, on-the-books nannies, and those that can issue receipts. Under-the-table babysitting expenses are not qualified.
- To qualify, the child must be no more than 13 years old, or the adult-dependent should not be able to take care of themselves
- For the taxable year 2021 ONLY
- the maximum allowed credit is $8,000/child or up to $16,000 for two or more children.
- For 2021, if your tax credit exceeds your tax liability, you can claim it as a refund.
- The maximum percentage that can be claimed is 50% of income up to $125,000.
What is Child and Dependent Care Credit
A Child and Dependent Care Tax Credit is a child care credit given by the government for parents or heads of the family who paid for someone to take care of their child (daycare centers, professional nannies) and dependents with disabilities.
Originally, the tax credit could not exceed the amount of tax liability for the year. However, for 2021, you can claim tax credit even if you don’t have any tax liability or if your tax credit exceeds your tax liability. Therefore, you can claim a tax refund on the amount you paid.
Note that this is not a full refund of the amount paid but a “subsidy” to offset a portion of the amount you paid for the care provider.
Tax Credit vs. Tax Deduction
While both reduce the taxes, you will pay to the IRS, each has a different effect and is reflected differently in the tax return.
A tax credit is an amount you can claim back after tax has been computed, while a tax deduction is an expense deducted from your income to arrive at your net tax payable.
Tax deduction directly impacts your earned income by increasing your qualifying expenses and reducing your income tax. On the other hand, a tax credit directly impacts the taxes you will pay.
For example, a 1,000 tax credit means that you can deduct 1,000 from your total tax liability. In contrast, a 1,000 tax deduction means that you deduct 1,000 from your income and might reduce your income tax liability by a few hundred dollars.
Child Tax Credit vs. Child and Dependent Care Tax Credit
Child Tax Credit (CTC) and Child and Dependent Care Credit are two different tax breaks.
CTC is a child care tax relief given to parents, working or not, who have qualifying children under the age of 17. A child can be a dependent child, foster or legally adopted child, stepchild, siblings, or stepsiblings.
Originally, the maximum amount you could claim as a deduction was $2,000 per child. However, the new American Rescue Plan temporarily increases the amount you can claim in 2021.
- Up to $3,600 for children below six years old
- Up to $3,000 for children six years old and older
For the 2021 tax return, the minimum requirement for $2,500 earned income is waived. Therefore you can still get a tax refund even if you don’t owe any taxes.
Please note that the government does not allow claiming the same childcare expenses twice. Be sure to check with your accountant to avoid any problems with the IRS.
Who can claim
You (and your spouse, if married and filing jointly) can claim tax credits when you:
- Paid for someone to take care of your child or dependent.
- Aare the primary caretaker (or custodial parent) of the child.
- You (and your spouse) must have earned income – or income from a job or self-employment. Trust fund proceeds, investment returns (such as the return of proceeds of insurance claim) are not considered income.
However, the IRS offers a few exceptions to this rule:
- Your spouse is a full-time student or is disabled
- If your partner is in jail or is hospitalized and cannot take care of a child
- If your spouse is actively looking for employment
Divorced or Separated Parents – Who can claim the credit?
When parents are divorced or separated, the custodial parent is the one where the child stays for more nights out of the year, regardless of the divorce or separation arrangement.
What childcare expenses are qualified
You can claim the child and dependent care credit on expenses paid to:
- A licensed daycare center or pre or post-school care
- A babysitter who is not your child
- Exception – under the table babysitter
- On-the-books nannies
- Cook, housekeeper, cleaning person who provides care
- Day camp or summer camp as long as they are chosen to provide care for your child. Overnight camps are not qualified
For childcare expenses to be valid, the person who provided the care must not be one of the following:
- A person you also claim as a dependent
- The parent of your qualifying person
- Your child under the age of 19 (regardless if claimed as a dependent or not)
The following also don’t qualify as care expenses:
Who is a qualifying person?
You can claim the tax credit if you paid it for the care of
- A child (biological, adopted, step, or foster child) less than 13 years old at the end of the taxable year.
- Children under age 13 who are physically or mentally incapacitated
- Your spouse or adult who is mentally or physically incapacitated to take care of themselves
- A US Citizen, US National, or a US Resident Alien.
The dependent should have lived with you for more than half a year to be qualified for Child and Dependent Care Credit.
Mentally or Physically Incapacitated – Definition
A person is mentally or physically incapacitated, and therefore, will qualify for a tax credit, when because of his or her condition/s, is unable to take care of his or her hygiene, to eat, or requires the full-time attention of someone for the dependent’s and other people’s safety.
A child turning 13 in 2021 can claim tax credit
When a child turned 13 this 2021, you can claim as tax credit expenses paid for before the qualifying child turned 13.
Total amount that can be claimed
For the taxable year 2021 only (the tax you will file in 2022), the US government allowed for a higher amount to be claimed regardless of whether you owe the government tax or not. This means that you can claim a tax refund should the amount of taxes you paid exceed the amount you owe.
- the amount of qualifying expenses is $8,000 for one child or up to $16,000 for two or more children/dependent.
- The maximum credit is up to 50%. The exact percentage is dependent on your income level. The bigger the income, the lower the tax percentage you can claim.
The regressive credit percentage is as follows:
|Lower limit||Upper limit||Percentage (2021)|
|$125,001||$183,000||50% – 20%|
|$400,001||$438,000||20% – 0%|
Again, this is only for 2021 tax returns only. No advice yet if this benefit will be extended for the taxable year 2022 (tax filing in 2023)
Employer-provided child care benefits
When your employer offers you child care benefits, it may be more beneficial to claim this than opting for child and dependent care credit.
Your employer is required to report it as taxable income if the amount exceeded $5,000. However, for 2021, this amount increased to $10,500. If the amount is below that, it is not recorded as your income.
Before determining the total amount of credit, you must first deduct any benefits that are provided to you by your employer.
How to compute tax credit
Tax credit is pretty straightforward. When you determine your total tax liability, it is a matter of figuring out how much you can claim as a credit.
Sample computation 1:
You have one qualified dependent for which you paid $7,000 in child care expenses. Your adjusted gross income is $90,000.
Since your income did not exceed the phase-out threshold of $125,000, you can claim as credit 50% of the total amount you paid. Therefore, the amount of credit will be $3,500.
|Adjusted Gross income (less than $125,000)||$90,000|
|Amount of child care expenses (1 dependent)||$7,000|
|Computation||$7,000 * 50% = $3,500|
Sample computation 2:
You have two qualified dependents for which you paid a total of $20,000 in child care expenses. You and your spouse have a total adjusted earned income is $120,000.
Since your income did not exceed the phase-out threshold of $125,000, you can claim as credit 50% of the total amount you paid. Your total credit is $16,000 computed as follows:
|Adjusted Gross income (less than $125,000)||$120,000|
|Amount of child care expenses (2 dependent)||$10,000|
|Computation||$16,000 * 50% = $8,000|
Frequently Asked Questions:
Are pre-school tuition fees deductible/claimable?
The rule of thumb is tuition fees are not qualifying expenses. However, when you pay for daycare or schooling where you cannot separate the cost between education and daycare, then it may be eligible.
Are babysitting expenses creditable?
Babysitting expenses are claimable provided that:
- the babysitter is not your dependent. Therefore you cannot claim babysitting expenses on your child for taking care of its siblings
- if the babysitter is not under 18 years old. They cannot be blood relatives.
- you provide the name, address, and social security number/tax identification number of the one who took care of your child
- the babysitter can issue proof of payment/receipt
It is still best to avail the services of licensed daycare providers or on-the-book nannies to ensure that the amount you may qualify for credit.
The amounts mentioned herein are exceptions to the Child and Dependent Care Credit as mandated by the new American Rescue Plan. These are only for 2021 tax returns and are subject to change this 2022.
These are also the same rulings if you are claiming for dependent care expenses.
It is to note that we are not tax experts, and the facts mentioned herein are based on general knowledge. For tax preparation and filing, it is still best to talk to your trusted accountant or lawyers or use tax preparation software available in the market.
To aid your tax professionals, be sure to ask and keep your receipts, and only entrust your child to licensed daycare professionals, like Brightside Ohio.