A Potential Tax Credit of up to $8,000 for One Child Can Be Claimed as Child Care Expenses

By NATE GARTRELL On Feb 2, 2022

Tax season is here, so millions of people will have the opportunity to earn money. As a start, parents will receive the remainder of their child tax credit with their refund.

A new child and dependent care credit, offering a maximum return of $8,000 for one or $16,000 for two or more children, is also available this year, CNET reported.

Due to a one-time expansion of the American Rescue Plan Act, this occurred.

Child and dependent care credits allow taxpayers to lower their taxes by the amount spent on daycare, babysitters, or transportation related to the care of their children. How does it work? In order to claim the tax break on your income tax return, you’ll need all your receipts and other monetary proof.

Below are the details of the child care tax credit.

What Does the Child and Dependent Care Tax Credit Entail?

The child and dependent care credit allows parents to claim child care expenses as a tax break. When you file your taxes this year, you can claim a credit for expenses like paying for day care while working.

For 2021 taxes, how will the child care credit differ? Prior to this year, you could claim a maximum of $3,000 for one child or $6,000 for two or more.

If you have a single child or dependent, you can claim up to $8,000 and if you have multiple children, you can claim up to $16,000 in 2021.

Additionally, the maximum return on child care expenses is increased from 35% to 50% under the one time expansion of the child care credit for 2021.

This is because specifically, you can receive up to $4,000 for one child and up to $8,000 for two or more children for the 2021 tax year.

For previous years, the maximum credit return for one child was $1,050 or $2,100 for two or more. This represents a 381% increase!

The child and dependent care credit was nonrefundable before the American Rescue Plan, which meant you would not receive a refund if it reduced your tax bill to zero.

Currently, the credit is fully refundable, which means that even if you don’t owe taxes you will receive money for it.

Child Care Expenses: What Are Qualifications?

Expenses are defined by the law in terms of child care providers, but some wiggle room is given to something like transportation. As long as you are paying the provider, any organization or individual providing care to your dependent counts. It does not include a spouse or unpaid relative.

Elaine Maag, the principal research associate at the Urban Institute, said the IRS has relatively relaxed rules about care providers. The chances of claiming child care credits are better if you are paying someone or a group that is operating in an official capacity, such as nursery schools or daycare centers, rather than $40 to a teenager to look after your child.

Care Providers Who are Qualified

What qualifies	What doesn’t qualify
Day care expenses	Your spouse
Before- and after-school care programs	The dependent’s parent
Day camp	Your children
Transportation to and from care providers	Babysitters paid “under the table”*
Babysitters, nannies, housekeepers

The parents of children who pay their babysitters cash “under the table” should be aware that claiming a tax credit for child care may be risky since the provider may not have been able to document the income.

What Are Ways in Which I Can Claim Child Care Expenses on My Taxes?

Your child care expenses should be detailed, including all receipts from day cares and after-school programs. In the days leading up to tax day, complete Form 2441 and include it with your Form 1040 tax return.

According to the IRS, you’ll need to report the name, address and Tax Identification Number (TIN) of the care provider on your return. Fill out Form W-10 to ask your healthcare provider for information.

It is important to note that some tax software packages including TurboTax and H&R Block include a child and dependent care credit form. A child care credit is calculated based on whether you paid for child care during the year and whether you have a child under the age of 13.

Can I Get a Maximum Amount for Child Care Expenses in 2021?

According to the IRS, taxpayers who accrue expenses in 2021 can claim up to $8,000 of eligible expenses for one dependent or up to $16,000 for two or more dependents.

Please note that the child and dependent care credit is different from the similarly titled child tax credit.

Last year, advance child tax credits were distributed on a monthly basis. You can get between $500 and $3,600 per child if you are eligible for the child tax credit and did not receive advance payments.

What Effect Does My Income Have on the Amount of Money I Can Get?

Tax filers must have earned income, such as wages or unemployment benefits, to qualify for the child care credit. You and your spouse must both have earned income if you are filing a joint tax return. (Exemptions apply to full time students and recipients of disability benefits.) The IRS said that generally you may not take the child care credit if you are married and filing separately.

In general, income does not affect the maximum amount that can be claimed for child care expenses. In contrast, the rate of return for the child care credit decreases with increasing income.

The credit rate for the 2021 tax year begins to decrease when a taxpayer’s income or household AGI (adjusted gross income), reaches $125,000. Each $2,000 earned over $125,000 reduces the credit rate by 1%, up until $183,000, at which point it settles at 20% for all those earning $183,001-$400,000. A tax credit rate of 40% would be applied to an AGI of $145,000, for example.

A family earning over $400,000 will also get a 1% credit reduction for every $2,000 earned over $400,000, up to and including zero for families earning $438,000 or more. A tax credit rate of 15% would apply to someone with an AGI of $410,000, for example.

Can I Claim Child Care Tax Credit If I Have a Dependent?

IRS stated that dependents are eligible for tax benefits if they meet one of the following requirements:

Have a minimum age of 13 or
Be unable to care for themselves if 13 or older (for example, if you have a spouse or older dependent who is impaired and incapable of caring for themselves, and has lived with you for more than half the year), or
have a mental or physical disability that prevents them from caring for themselves.

Furthermore, the qualified dependent must have a tax identification number, such as a Social Security number.

If I Am Separated or Divorced, What Should I Know?

The child care credit can only be claimed by the custodial parent. Custodial parent is defined by the IRS as the parent who lived with the child most nights in 2021. Divorced or separated parents follow the same rules as those governing child tax credit and shared custody.