Child and dependent care tax credit: Who qualifies and how to get up to $8,000 in credits

Few events have illustrated just how important child care is to both Americans’ wallets and the broader economy than the coronavirus pandemic: When families struggle to find or afford a caregiver, they’re often unable to work.

Households, however, have options to help defray some of those costs, one of which is the child and dependent care tax credit.

But while the tax break can provide essential financial help, it’s been massively revamped over the years, first with President Donald Trump’s Tax Cuts and Jobs Act of 2017 and again with President Joe Biden’s American Rescue Plan for 2021. That can make it harder for families to understand who qualifies — something that’s even more important for the 2022 tax-filing season, considering that even more families are eligible for a fully refundable credit that’s nearly quadrupled in size.

Here’s how the credit works, who qualifies and how much you could receive to help offset the cost of spending thousands of dollars each year on child care.

What is the child and dependent care credit?

The child and dependent care credit is a tax break to help cover families’ child care expenses, so they can continue working or searching for employment. That work could be for your own business, as well as both full- and part-time jobs.

If you paid for babysitting, day care or even a summer camp, you might be eligible to receive up to $8,000 in credits during this year’s tax season, depending on how many dependents you have and your household’s adjusted gross income (AGI). That’s up from $2,100 in all other tax years.

The “work-related” qualifier is key. Paying for babysitting or child care expenses to take a vacation, for example, wouldn’t be considered a qualifying expense.

“The point of the child and dependent care credit is a subsidy, so you can work,” says Eric Bronnenkant, CPA and CFP, who is head of tax at Betterment. “If you are a stay-at-home mom or dad, you typically don’t get any credit because of the fact that it is not helping you work, even if you are paying for dependent care.”

Be careful not to confuse the child care credit with the similarly named child tax credit, which was also expanded for 2021 and came with no restrictions on how to use the money.

How to qualify for the child and dependent care credit

To claim the child and dependent care credit, U.S. families must have:

• a qualifying child or dependent;
• child care expenses that you incurred to either work or look for a job;
• a jointly filed tax return if you’re married, unless you’re considered legally separated; and
• earned income during the tax year, as long as it wasn’t more than $438,000 annually.

U.S. citizens can claim the credit, as well as taxpayers that the IRS considers residents and non-residents. The credit, however, is only refundable if a taxpayer lives in the U.S. for more than half of the year.

Dependents

Your child care expenses must be related toward caring for children who are younger than 13 years old.

In special circumstances, though, taxpayers can claim expenses from caring for individuals older than 13 if they’re considered physically or mentally incapable of providing their own care and live with you for more than half of the year, according to the IRS. Those could be your dependents, as well as a spouse.

Child care expenses

Caregiving expenses that you can claim include the cost of putting your child in daycare, preschool, day camp and nannying arrangements.

Caretaking can be provided both outside or inside your own home, but you’ll have to provide the IRS with the proper documentation — usually the caregiver’s name and individual taxpayer identification number (ITIN), which is often their social security number. And if you’re claiming child care-related expenses, that likely means the caregiver will have to have reported that income to the IRS during the year.

You can even pay relatives to take care of your children, so long that they are not:

• Younger than age 19 when they provided that care;
• An individual who you or your spouse can claim as a dependent;
• Someone who was your spouse at any time during the past year; or
• The parent of your qualifying dependent.

Taxpayer status

Married taxpayers also have to file a joint return to claim the credit, unless you’re considered legally separated or living separate from your spouse — distinctions that would lead the IRS to classify a taxpayer as “unmarried.”

That rule is most likely to prevent couples from claiming the credit when one spouse makes above the income threshold to qualify but the other doesn’t, according to Mark Jaeger, vice president of tax operations at TaxAct.

“It’s trying to prevent the gaming of the system to try to get these credits,” he says. “There are some credits that the IRS just doesn’t give to you, or it’s much harder to claim, when you’re married filing separately.”

Earned income

Wages, salaries, tips or other forms of pay where federal income taxes are withheld count as earned income, according to the IRS.

But that’s where one of the tricky qualifications occurs. The IRS lets taxpayers expense child care-related expenses that they incurred while looking for work, but if you don’t find a job and thus have no earned income for the year, you can’t claim the credit.

How much money U.S. households could receive

How much you receive depends on how much you spent during the year on work-related child care. Taxpayers with one child can submit up to $8,000 of qualifying expenses, while U.S. households with two or more children can claim up to $16,000. The IRS will then reimburse 50 percent of what you paid, meaning a maximum of $4,000 for one child and $8,000 for two or more children — as long as your household earns under $125,000 a year.

After 2021, the credit will revert back to what it was in 2020. U.S. households have to have a combined income of less than $15,000 to get the maximum $1,050 for one child or $2,100 for two or more children — an IRS reimbursement rate of 35 percent, meaning taxpayers with one child can claim a maximum of $3,000 expenses, while workers with two children can claim up to $6,000.

How the credit is phased out

The more money you make, the smaller a reimbursement you can expect from the IRS.

Typically, the 35 percent maximum reimbursement rate begins to gradually phase out once a taxpayer earns more than $15,000 a year, until reaching 20 percent once a household makes between $45,000 and $438,000 in annual income. That means all taxpayers whose incomes fall in that threshold would receive up to $600 in credits if they have one child or $1,200 if they have two or more children.

The phase out looks different for taxpayers in 2021. If you make more than $125,000, you’ll see your credit gradually fall:

• From 50 percent to 20 percent as your annual AGI rises between $125,001 and $183,000; and
• From 20 percent to 0 percent as taxpayers’ incomes rise from $400,001 to $438,000.

That means, to get at least 20 percent of your expenses reimbursed, you have to have made between $183,001 and $400,000.

“That’s a huge difference,” Jaeger says of the change. “People know that they’re eligible for this, but I don’t think they realize how big of a credit it is this year.”

How does contributing to a workplace plan impact the credit?

Some workplaces let employees contribute funds tax-free to a flexible spending account (FSA) specifically for child care. That money is already getting a tax benefit, and the IRS won’t let you double-dip, meaning the FSA funds that you used to cover a work-related child care expense can’t count toward reaching your maximum.

But you can deduct the difference. Say you spent $14,000 in the year on child care for your two children, and you covered $10,000 of those expenses with your FSA funds. You could claim the remaining $4,000 on your taxes, which would get you a $2,000 tax credit, so long as you don’t make more than $125,000.

You can contribute up to $10,500 to your child care FSA in 2021, up from $5,000, according to the IRS. For married employees filing separate returns, the maximum amount is increased to $5,250, up from $2,500.

Here’s how to claim the credit on your tax return

Taxpayers will have to complete “Form 2441” to claim the dependent, including it with their federal income tax return.

In the instance that your dependent or spouse is not able to take care of him or herself, you should be prepared to submit information describing the disability, according to the IRS.

On that form, the IRS also asks for even more information about qualifying caregivers than their social security or ITIN numbers, including their address, whether they work as your household’s employee and the total amount that you paid them.

All of that means, you’ll want to keep careful track of how much you spent on work-related child care in any given tax year. Most businesses should send you all of the information that you need at the end of the year, but individually employed nannies, relatives or caregivers might not. Even so, tallying for yourself how much you spent can help ensure that you don’t leave any money on the table.

“Whether it’s through an Excel file, receipts, credit card statements, that organization method is always good to have as a double check to make sure you didn’t forget a payment or your daycare provider didn’t forget a payment,” Jaeger says.

It will take an act of Congress to extend expansions to the child and dependent care credit beyond 2021. The work-related requirements might be enough to capture a crucial swing vote from Sen. Joe Manchin, a Democrat from West Virginia, who rejected extending expansions to the similar child tax credit for that reason. Taxpayers still might want to hope for the best and plan for the worst.

“It’s always better to have some tax break versus none, but on the pre-rescue plan, it was not a particularly generous tax break — even for people who got the most amount of benefits that they could,” Bronnenkant says.

Learn more:

• Filing your taxes soon? Here’s how COVID-19 relief could affect what you owe
• Where’s my refund? How to track your tax refund
• Earned income tax credit: What it is and who qualifies