The Expanded Child and Dependent Care Credit is a tax credit that can benefit you if you have children or other dependents to help you cover expenses related to their care. In 2021, President Biden and Congress enacted the American Rescue Plan Act of 2021, which includes an update to the care credit, which has remained essentially the same since its establishment in 1976. To understand what’s changed and how it affects your finances, we’ve created a list of the most significant changes you’ll need to know before filing your 2021 tax return below.
What changed with the expanded Child and Dependent Care Credit?
Previously, parents or primary guardians could receive 35% of $3,000 worth of care expenses in tax credits, which amounted to a maximum of $1,050. Unfortunately, this $1,050 wasn’t enough to cover costs for struggling families, leaving many to seek debt consolidation loans that could help solve their tax obligations.
For 2021 taxes only (so far), the threshold has been increased to 50% of $8,000 worth of child care expenses for one child or dependent and $16,000 for two. This means the credit has increased from $1,050 to $4,000 for qualifying taxpayers.
Before the American Rescue Plan, the child care tax credit was non-refundable, meaning you couldn’t receive money back from the IRS if you hadn’t paid enough taxes to cover the credit. Now, eligible families can request a refund of the credit even if the tax credit exceeds the total amount of Federal tax owed.
Lastly, the biggest change is how eligibility is handled for those families that earn an income. To receive the maximum amount, 50% of your child care expenses up to $8,000, your family must earn an Adjusted Gross Income (AGI) of $125,000 or less. The percentages decrease for income levels higher than that, and families with an AGI of $438,000 or more aren’t eligible to receive any credit.
What expenses are eligible to be credited back?
It’s a good idea to consult with an accountant to verify your expenses for child care are eligible and keep copies of your receipts. Generally, though, these expenses are considered covered by the tax credit:
- Before or after school care programs
- Day camps
- Transportation costs
- Babysitters, nannies, and housekeepers so long as the person is paid as a documented worker. Paying your babysitter $50 under the table won’t qualify.
Am I qualified to receive the child and dependent care credit?
There are a few eligibility requirements to receive a refundable credit for the care expenses of a child or dependent:
- Your child is 12 years or younger.
- Your dependent is physically or mentally incapable of living independently and has lived with you for more than half the year.
- The expenses must directly enable you or your spouse to work or actively seek employment.
- You and your spouse must file a joint return to qualify.
- You or your spouse must have earned an income from a job. Currently, income earned from investments or dividends does not qualify.
- To receive the full credit, your family must have an AGI of no more than $125,000. Your AGI must not exceed $438,000 to qualify for a reduced percentage.
- Your child or dependent must be claimed as a dependent on your tax return with their name, address, and social security number.
The bottom line
The expanded Child and Dependent Care Credit can reduce your taxable income when you pay for daycare or other dependent care. However, it’s essential to know which parts of the expansion are relevant to your financial situation and how you can use them to your advantage should you qualify.