There are more than 60 million kids in U.S. families with children, and that number is expected to increase in 2021. Meanwhile, a lesser-known, but more generous, tax benefit is available to parents, providing up to $8,000 in tax credits this year.
In the 2021 American Rescue Plan, the maximum child care expenses parents can claim on tax returns were increased and the credit was made fully refundable. In the latter case, you’ll get your refund if the tax credit exceeds what you owe the IRS.
Child and Dependent Care Credit is not new. In the meantime, the credit had failed to keep up with the costs of child care, with the child advocacy group First Five Years Fund reporting in 2018 that the credit covered no more than 10% of the cost of care for two children in the U.S.
Several tax benefits were created by the American Rescue Plan for families. The Biden administration pledged to significantly expand the Child and Dependent Care Credit, which they said would aid parents in returning to work. A tax credit of up to $8,000 will be available to parents under the expansion.
By comparison, the expanded Child Tax Credit provides $3,600 for each child under the age of six and $3,600 for children aged 6 to 17, according to CBSNews.
“They are recognizing the increasing cost of child care in our country,” Robbin Caruso, co-leader of Prager Metis’ National Tax Controversy Practice, said.
“It’s a huge opportunity for taxpayers, and it shouldn’t be missed out on.”
Because it’s fully refundable, this could boost the tax refund that many parents obtain this year, experts stated. Tax credits reduce a person’s taxable income dollar-for-dollar, as opposed to deductions.
This means taxpayers are more likely to take advantage of tax credits like the Child and Dependent Care Credit than deductions.
Read More: IRS Indicates Two $3,600 Payments to Be Made in February
What is the Best Way to Get $8,000?
Parents with two or more children can receive up to $8,000 in tax credits.
Families can claim a tax break worth 50% of their child care expenses, which can be up to $16,000 for families with two or more children.
Prior to the American Rescue Plan, parents could only claim 35% of a maximum of $6,000 in child care expenses for two children, or a maximum tax credit of $2,100.
Up to $8,000 can be claimed by parents of one child for 50% of their child care expenses. The maximum tax credit for parents with one child is $4,000 this year.
Many parents “may not realize how much it’s increased,” said CPA and TurboTax expert Lisa Greene-Lewis.
What are the Eligibility Requirements?
The expanded tax credit is available to people who paid for the care of a qualifying individual so that they could work or find work during 2021.
The IRS defines a qualifying individual as:
- Under 13-year-old child who is dependent on you.
- Someone who lives with you for more than six months and does not have the ability to care for themselves.
This second provision is important since it extends the benefit to those who care for older or disabled children.
“If you have a child with disability, there’s no age limit,” Greene-Lewis stated.
Is There a List of Valid Expenses on the Tax Credit?
As the Child and Dependent Care Credit is designed to make it easier for working people to pay for child care, parents must have spent money on caring for their children or dependents in order to work or look for a job. Spending on care for elderly relatives can be claimed as an expense, such as adult day care.
- From nannies to child care centers, care can be provided both inside and outside of the home. Parents must also provide the providers’ Social Security number and their Employer Identification number to the IRS, as well as tick a box indicating whether they are household employees. (View the form for claiming the tax credit here.)
- Camps that are held during the day qualify, but overnight camps do not, since overnight camps do not require parents to work or to seek employment.
- According to the IRS, before- and after-school programs are also considered child care expenses eligible.
- In some cases, care provided by a relative who is not your dependent is eligible too.
“It can count for summer camp, sports camps — as long as it’s enabling you to work or look to work,” Greene-Lewis explained.
Which Expenses aren’t Covered?
It is important to note that the IRS recognizes not all expenses, just as not all overnight camps are eligible.
- If you send your child to private school, the tax agency notes that you can’t claim that as an expense under the Child and Dependent Care Credit since K-12 tuition is considered an educational expense, not a child care expense. (However, as noted above, before-and after-school programs are eligible, the IRS says.)
- If care is provided by dependent relatives will not qualify. The IRS said you can’t pay your older child to take care of your younger child and expect tax credit. Also, you shouldn’t pay your spouse to look after their own child.
Read More: IRS Indicates Two $3,600 Payments to Be Made in February
Does it Matter If I am a Student, a Part-time Worker, or Work from Home?
According to the IRS, parents must work or be looking for work to qualify, but there are some exceptions.
- IRS guidelines consider parents to be working during any month when they are full-time students.
- Either full time or part time work can be done for an employer or for yourself in your own business or partnership. Working from home is equally possible.
There is one major caveat, however: although the credit assists people looking for work, qualifying taxpayers must have earned income in the year. You cannot claim the tax credit if you looked for work but didn’t find one (and therefore did not earn income in 2021).
How Will the Tax Credit Be Handled Next Year?
The expanded Child and Dependent Care Credit will only be valid for the 2021 tax year, like many of the provisions in the American Rescue Plan.
The tax credit will return to its previous form in 2022. In other words, parents who claim the tax credit on their returns next year will receive a reduced benefit of up to $2,100.