Child and dependent care credit: How to get $8,000 or $16,000 back for child care expenses - CNET

The child and dependent care credit means parents can write off expenses such as a day care center or in-home carer. 

Sarah Tew/CNET

If you pay for child care services in 2021, you can claim those expenses in tax credits up to $16,000. This includes any money you paid toward day care, nannies, day camp and transportation costs. Note that this is different from the child tax credit payments -- those are for up to $3,600 per qualified dependent.

If your income meets the requirements, you can claim up to 50% of these child care related expenses, which max out at $8,000 for one kid and $16,000 for two or more children. This credit may not be the flamboyant part of the American Rescue Plan passed in March, but along with some major health care perks, it could be one of the most sweeping benefits for families.

Here's what you need to do now: Start gathering information to make sure you don't miss out on any money when you file your taxes next year. We'll explain how these child care tax credits work below. We've also made some suggestions on how you might use the extra money. Also find out how to see if your state owes you money. 

The child and dependent care credit: Here's what we know

The child and dependent care credit is designed for parents to claim expenses from child care throughout the year, for example, if you're working and paying for services such as day care or a babysitter for your kids. These expenses can be claimed when you file your taxes each year.

How much you can get from the expanded child care credit has changed for expenses accrued for 2021. For instance, the maximum amount you could claim for multiple children in previous years had been $6,000 (now it's $8,000). Under the new stimulus law from March 2020, you can now claim up to $16,000 in child care expenses for multiple children.

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What child care expenses are eligible toward the credit?

The law defines expenses based on child care providers, but there's some wiggle room that also accounts for expenses like transportation. The key is that any organization or person that provides care for your dependent is counted as a child care provider as long as you're paying them. 

The IRS has relatively relaxed rules about care providers, according to Elaine Maag, principal research associate at the Urban Institute. However, you may have better luck claiming child care credits for people and groups operating in an official capacity, like your city's summer camp program, than giving a neighborhood teen $40 to watch your child for a couple hours.

Qualified care providers

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

*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.

How to claim the child and dependent care expenses next year

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 -- that means any receipts you get from day cares or after-school programs showing the expenses you paid for. Then, you'll complete Form 2441 and attach it to your Form 1040 tax return. 

According to the IRS, you'll need to report the name, address and TIN (it can be a social security number or the employer identification number) of the care provider on your return. You can use Form W-10 to request the information you need from your care provider.

Note that the child and dependent care credit form is built into tax software like TurboTax and H&R Block. For example, it may ask if you have a child under age 13 and if you paid for child care during the year.

If you have any child care expenses, make sure to keep records.

Sarah Tew/CNET

Total amount of expenses you can claim per dependent for the child care credit

For expenses accrued in 2021, 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. 

This is different from the 2021 child tax credit-- those expanded payments start this year. Starting in July, you can get between $500 and $3,600 in payments.

Income limits and eligibility requirements: What to know now

To qualify for the child and dependent care tax credit, a household's adjusted gross income needs to be less than $125,000. If your income exceeds that amount, your tax credits will phase out at 50%. For example, instead of receiving the full $8,000, you'd be eligible to 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 families 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 household's combined income exceeded $183,000.

Qualifications extend not just to parents, but to dependents, too.

Sarah Tew/CNET

Eligibility rules that apply to your dependents

According to the IRS, qualifying rules for dependents are fairly broad. In order to qualify, dependents must:

• Be under the 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 has lived with you for more than half the year -- you can claim the 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.

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Here's what separated and divorced parents need to know about claiming the child care tax credit in 2022

Only the parent who has primary custody can claim the child care tax credit. The rules are similar to those governing the child tax credit and shared custody. 

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.

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 opt out of the monthly child tax credit payments.

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