The Child and Dependent Care Credit

Many parents and people caring for dependent family members can receive a tax credit for expenses paid to care for these individuals. This credit is designed for taxpayers who must pay for a dependent’s care while they go to work or look for employment. However, to qualify, you and your dependents must meet certain criteria set forth by the IRS.

Note that the American Rescue Plan Act (ARPA) of 2021 made some temporarily but significant changes to this tax break. See below for more information about how the ARPA affects the Child and Dependent Care Tax Credit.

Does Your Dependent Qualify?

The person that needs care must be considered a qualified dependent for the purposes of the Child and Dependent Care Credit. A qualified dependent can be a child or an adult that needs supervision or care. The general rules for a qualified dependent include the following:

• A child who is under the age of 13
• A dependent adult family member or spouse who is unable to perform self-care due to mental or physical impairments
• The dependent must have lived with you for at least half of the tax year

If your dependent meets the criteria, you may be able to claim a tax credit for the cost of their care, as long as you fulfill the IRS income and need requirements.

RELATED: The Child Tax Credit

Are You Eligible to Claim This Tax Credit?

The Child and Dependent Care Credit is designed for people who must pay dependent care expenses while they’re earning an income. To qualify, you must have earned income from wages, self-employment, or other types of taxable income. Income from certain sources (such as unemployment compensation, dividends, interest, worker’s compensation, welfare, social security, or child support) is not considered “earned income.”

In addition to earning income, you must be paying for the care of a qualified dependent. The care expenses must be work-related, which means that the care is necessary in order for you/your spouse to work (or look for work). Dependent care expenses that are not work-related do not qualify for this tax break.

Also note that you cannot claim the Child and Dependent Care Credit if your filing status is “married filing separately.”

What Expenses Can Be Included?

The Child and Dependent Care Credit is worth a percentage of the total costs you paid to care for your dependent. This percentage may be as high as 35%, depending on your income level.

To figure the total amount spent on dependent care, add up your work-related care expenses, including the following:

• Payments Made to Care Providers. The money you pay to care providers, such as a daycare or an at-home care provider, are eligible expenses. However, the payments cannot be made to the child’s parent, your spouse, your own child (under age 19), or to another person you claim as a dependent.

 

• Expenses to Care for Your Home. Some household expenses (such as a home repairs, housekeepers, or cooks) may be partially included if they are used to care for your dependent.

 

• Transportation, Food, and Other Expenses. Certain expenses, like food or transportation, may be eligible if they are required as part of your dependent’s care.

You will need to provide proof of your expenses, including information about your dependent’s care provider(s). The Child and Dependent Care Credit has specific restrictions, so it’s recommended that you seek the advice of a tax professional before claiming this credit on your income tax return.

For more information, please see IRS Publication 503 (Child and Dependent Care Expenses).

The American Rescue Plan Act (ARPA) Temporarily Changes the Child & Dependent Care Tax Credit

The American Rescue Plan Act of 2021 makes some temporary changes to this tax credit by raising the maximum amount you can claim to $8,000 for taxpayers with one child/dependent or $16,000 for taxpayers with two or more children/dependents. This applies to 2021 tax returns only.

Here is the information that the IRS provides about the Child and Dependent Care Credit for the 2021 tax year:

The ARPA increases the amount of the credit and eligible expenses for child and dependent care, modifies the phase-out of the credit for higher earners, and makes the credit fully refundable.

For 2021, the maximum amount of qualifying expenses you can claim for this credit increases from 35% to 50%. Eligible families can claim qualifying child and dependent care expenses of up to:

• $8,000 for one qualifying individual (up from $3,000 in prior years) or
• $16,000 for two or more qualifying individuals (up from $6,000 before 2021)

This means that the maximum credit in 2021 (which is 50% for one dependent’s qualifying expenses) is $4,000 for one dependent, or $8,000 for two or more dependents.

Employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses when you are calculating this credit.

The more a taxpayer earns, the lower the credit percentage. But under the new law, more people will qualify for the new maximum 50% credit rate. That’s because the adjusted gross income (AGI) level at which the credit percentage is reduced is raised substantially from $15,000 to $125,000.

Above $125,000, the 50% credit percentage is reduced as income rises, plateauing at a 20% rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20% until reaching $400,000 and is then phased out above that level. The Child and Dependent Care Credit is completely unavailable for any taxpayer with AGI exceeding $438,000.

In 2021, for the first time, the credit is fully refundable. This means that an eligible family can get it as a tax refund, even if they owe no federal income tax.

RELATED: Tax Credits for Families With Children and Dependents

Child and Dependent Care Credit: FAQ

1. What is the Child and Dependent Care Credit?
The Child and Dependent Care Credit is a federal tax credit that helps working families offset the cost of childcare (or caring for a dependent in general) while they work or actively look for work. This credit can not only reduce your tax liability if you qualify, it can also provide financial relief for eligible expenses. It’s quite a useful credit for those with a need for it.

2. Who qualifies for the Child and Dependent Care Credit?
If you want to qualify for the Child and Dependent Care Credit, you must meet the following requirements:

1. You (and your spouse, if filing jointly) must have earned any amount of income during the tax year that you’re claiming the credit for.
2. The care expenses must be for a dependent child under the age of 13 or for a spouse or dependent who is physically or mentally unable to care for themselves.
3. You must provide the name, address, and taxpayer identification number (TIN) of the care provider.

Even while providing care you must be able to work or actively look for work.

3. What expenses are eligible for the Child and Dependent Care Credit?
Eligible expenses for this credit include the costs of daycare, babysitters, summer camps (but not overnight camps), and care provided in or outside your home for qualified dependents. Expenses related to schooling, tutoring, or extracurricular activities are not eligible, as this is not an education credit.

4. How is the credit amount determined?
For tax year 2024, there is a $3,000 limit for one qualifying person ($6,000 for two or more qualifying persons). Your credit amount will depend on your income and can be between 20 and 35% ($600 – $1,050) of your qualifying expenses. Finally, remember that this is not a refundable credit, so keep that in mind when claiming it, and don’t spend money thinking that it is.

5. How do I claim the Child and Dependent Care Credit?
You can claim the credit by filling out Form 2441, Child and Dependent Care Expenses, and attaching it to your tax return (Form 1040). It’s as simple as that. Also, be sure to include the care provider’s TIN and other required details to avoid any delays with the IRS.

6. I receive child care benefits through my employer, can I still claim the credit?

Yes, you can still claim Child and Dependent Care Credit if you receive child care benefits through your employer (through a Dependent Care Flexible Spending Account, for example). However the amount of employer-provided benefits reduces the eligible expenses you can claim for the credit. Essentially, you cannot “double dip” by using the same expenses for both benefits. And trust us, the IRS will notice.

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