The child and dependent care credit means parents can claim expenses such as a day care center or in-home provider.
Sarah Tew/CNETYou may already be planning for the first payments you'll get with the revised child tax credit. But the American Rescue Plan passed in March includes another tax credit to help parents in 2021. If you have child care expenses -- whether because you're paying for a day care center or for a provider to care for your child in your home -- you can claim the child and dependent care credit.
In short, that means credit for any qualifying expenses related to child care services up to $6,000 for one child and $16,000 for two or more dependents. Depending on your income, you can claim up to 50% of these expenses.
We''ll explain how these child care tax credits work below. In the meantime, if you need to figure out how much you'll get in child tax credits, you can use this calculator. You should check to make sure you are eligible for the payments and if your dependents are, as well. We've also made some suggestions on how to use the money. And here's more information on how you might benefit from new tax breaks, tax credits and expanded health benefits in 2021 -- and how to claim a tax refund from the IRS before it disappears on May 17.
The child and dependent care credit for 2021, explained
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 this year. For instance, the maximum amount you could claim for multiple children in previous years had been $6,000. Under the new stimulus bill, you can now claim up to $16,000 in child care expenses for multiple children.
Who qualifies as a child care provider
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 lax rules about care providers according to Elaine Maag, principal research associate at the Urban Institute. Here are some examples.
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 | |
| Transportation to and from care providers | |
| 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 credit (it may not be easy)
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.
How much to claim per kid for the child care credit
For expenses this year, under the American Rescue Plan, 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.
Watch this: Child tax credit: How much are you getting?
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Income limits and eligibility
A household's adjusted gross income needs to be less than $125,000 to be eligible, 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.
If you have any child care expenses, make sure to keep a record.
Sarah Tew/CNETQualifying rules for 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.
What divorced or separated parents should know about claiming the child care tax credit
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.
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.
Watch this: Stimulus plus-up payments: What you need to know
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