Tax season starts on Jan. 24 and eligible parents can expect the remainder of their enhanced child tax credit with their return. However, parents and caregivers may see an even bigger tax break this year.
You may be able to claim the child and dependent care credit if you paid for the care of qualifying individuals so that you and your spouse (if filing jointly) could work or actively search for a job, according to the IRS.
The IRS also warns that married couples filing separately may not be able to take advantage of this credit. If you are separated or divorced, only the custodial parent can claim the child care credit on their taxes. The custodial parent is the parent with whom the child lived for the greater number of nights during the year.
This one-time expansion of the credit in the American Rescue Plan Act allows parents who paid for child care in 2021 to be eligible to receive up to 50% of their child care expenses back as a tax break or refund.
What’s the Dollar Limit for the Child and Dependent Care Credit?
The credit is a percentage of the total amount of work-related expenses paid to a care provider for the care of a qualifying individual. Your percentage is determined by your adjusted gross income in 2021. This credit is also fully refundable, meaning eligible families can receive this credit even if they owe no federal income tax.
The total expenses used to calculate your credit cannot exceed $8,000 for one qualifying child or $16,000 for multiple children. This is not affected by income level; however, the amount you receive may decrease as income rises.
The credit percentage begins to phase out once your adjusted gross income reaches $125,000 and stops when your adjusted gross income is over $438,000.
What Counts as a Qualifying Expense?
Child and dependent care expenses must be work-related to qualify for the credit, according to the IRS. Expenses are considered work-related if:
- They allow you (and your spouse if filing jointly) to work or look for work.
- They are for a qualifying individual’s care.
Which Dependents Qualify for the Child and Dependent Care Credit?
According to the IRS, a dependent must meet at least one of the following criteria:
- Be a child of yours under the age of 13.
- Be your spouse, unable to care for themselves, and have lived with you for more than half the year.
- Be an individual physically and mentally incapable of self-care who lived with you for more than half the year as your dependent — or would have been considered your dependant if their income hadn’t exceeded $4,300 or more; or if they hadn’t filed a joint return; or if you, or your spouse if filing jointly, can be claimed as a dependent on someone else’s return.
You must provide the TIN (or SSN where applicable) of each qualifying person to the IRS.
How Do I Claim the Child and Dependent Care Credit?
To claim the child and dependent care credit, complete Form 2441 and attach it to your Form 1040 tax return.
Make sure you keep a record of all child care expenses, including receipts. You must also report the name, address and TIN of the care provider on your return. Your spouse, the dependent’s parent, your children or babysitters paid “under the table” are not considered qualified care providers.
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