Here's how to claim up to $16,000 in child care expenses on your 2021 taxes - CNET

You can get child care tax credits for expenses.

Sarah Tew/CNET

It's been a rough year for working parents -- between their professional jobs, tending to the burdens of remote learning and providing endless amounts of child care, many parents have been pushed to the edge. The American Rescue Plan Act, passed in March by Congress and signed by President Joe Biden, has sought to relieve some of those demands -- including using a new and temporarily expanded child care tax credit.

These credits aren't the same as the new child tax credit payments that are coming in July. Instead, you can claim any qualifying expenses related to child care, such as a daycare service or even an in-home care provider who you pay to watch your child while you're working (aka a babysitter). You can claim up to 50% of your expenses, depending on your income (we'll explain below). 

We'll tell you everything you need to know about how the child care tax credits work. While you're here, use our child tax credit calculator to see how much you'll get and how to spend your money. Also, make sure you're eligible for the payments, as well as your dependents. 

How much can you claim per kid for the child care credits?

For this year, under the American Rescue Plan Act, you can claim up to $8,000 for one child or up to $16,000 for multiple dependents, according to Garrett Watson, senior policy analyst at The Tax Foundation. 

Normally, parents can only claim up to $3,000 for one kid or up to $6,000 for two or more kids.

Is there an income limit to qualify for the child care credits?

Yes, a household's adjusted gross income needs to be less than $125,000, Watson said. If your income exceeds that amount, your tax credits will phase out at 50%. For example, instead of getting $8,000, you'd now get $4,000. The credit rate phases down again to 20% for those with an AGI of $183,000, and remains 20% until the income reaches above $400,000.

The credit rate eventually completely phases out for those earning $438,000 or more.

With the original child care tax credits, the credit rates would phase down to 35% if the income exceeded $125,000 and 25% if the income exceeded $183,000.

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What are the eligibility rules for dependents?

They are fairly broad. In order to qualify, according to the IRS, dependents must:

• Be under age of 13, or
• 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 who has lived with you for more than half the year -- you can claim the tax credits for them, or
• Be physically or mentally incapable of self-care -- even if their income was $4,300 or more -- and
• Have a tax identification number, such as a social security number.

Are there any rules for who provides care for your kids?

The IRS has relatively lax rules about care providers according to Elaine Maag, principal research associate at the Urban Institute. You can pay a relative, hire a housekeeper or recruit a nanny. You can also claim daycare expenses, before- and after-school care, day camp -- and transportation to and from your care provider, Watson said.

However, parents who pay their babysitters cash "under the table" should know it's risky to claim the child care tax credits since the income may not be claimed or documented by the provider.

If you're paying someone to care for your children, you can claim that expense.

Sarah Tew/CNET

Can more than one parent claim the tax credit? What about children of divorced or separated parents?

No. The rules are similar to those governing the child tax credit: Only the parent who has primary custody can claim the child care tax credit.

If you're married, both parents need to work -- or be receiving unemployment benefits -- to be eligible for the credit, Maag said. Also, if you're in school, you can still get credit.

How to claim the child and dependent care tax credit

You won't actually claim the deduction until you file your 2021 taxes next year (in 2022). For now, maintain a detailed account of all child care expenses -- including the nature of the expense who you paid and their tax ID. Then, you'll complete Form 2441 (PDF) and attach it to your Form 1040 tax return. 

For more ways you'll get money this year, here's how you could save up to $50,000 through one-time COVID credits and benefits in 2021. Also, here's how to spend your child tax credit money and how to opt out of the monthly child tax credit payments.

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