What Is the Childcare Tax Credit?
The childcare tax credit helps working adults earn a tax break not only for expenses related to childcare, but for taking care of other types of dependents, as well.
By Mike Azzara | American Express Credit Intel Freelance Contributor
5 Min Read | February 1, 2022 in Money
The childcare tax credit helps working parents offset the costs of daycare, summer camps, and other childcare expenses.
It also offers tax relief for expenses in caring for aging parents and certain other dependents.
For 2021, the childcare tax credit is refundable at the federal level.
Certain states may also offer refundable tax credits – which can get you money even if you don’t pay income tax.
We love our children. They can light up a room with the sweetest of smiles. When their eyes widen upon discovering something new, our hearts open wider. But caring for these little girls and boys costs money. And when you’re a working parent, doing all the care yourself isn’t as easy an option as some TV commercials might make it seem.
At least when tax season rolls around, you may get some of that money back through the federal child and dependent care tax credit. Also known as the childcare tax credit, it’s a tax break designed for working parents and guardians who are caring for a child, a spouse, or other dependents. Don’t confuse it with the entirely different child tax credit, which is intended to help taxpayers offset the overall cost of raising children (read “What Is the Child Tax Credit?").
To qualify for the childcare tax credit, you must have earned income in that tax year. And, if filing jointly, your spouse also must have earned income. The IRS lists three different ways to qualify for the child and dependent care tax credit:1
- For your child (or children) under 13.
- For your spouse who was not physically or mentally capable of taking care of themself and lived with you for at least six months.
- For any individual who was physically or mentally incapable of self-care and lived with you for more than half the year and either was your dependent or could have been your dependent except that he or she received gross income of $4,300 or more.
There are exceptions for married couples filing separately, parents who are legally separated, and other possibilities. IRS Publication 503 explains the various filing statuses and how to qualify under each.2
To start at the bottom line, the maximum amount of money by which the childcare tax credit can reduce your tax bill is $4,000 for one child or $8,000 for two or more – a 281% increase over 2020 due to the American Rescue Plan (ARP) Act of 2021.
Here’s the math you have to do to get there. The maximum amount of qualified expenses you can claim for one child is $8,000, or $16,000 for two or more. The tax credit you can get ranges from 20% to 50% of those expenses, depending on your income. The 50% max is for annual incomes of $125,000 or less; for every additional $2,000 of income, the percentage drops 1 point. To illustrate by example, let’s say you have $8,000 in childcare expenses for one child. Your tax credit would range from $1,600 to $4,000, depending on your income level. You double those numbers if you claim two or more children. The accompanying chart can help you visualize the numbers.3
|Number of Children||Amount of Qualified Expenses||Adjusted Gross Income (AGI)||Maximum Percentage of Expenses||Maximum Credit|
|1||Up to $8,000||$0-$125,000||50%
|2 or more
||Up to $16,000||$0-$125,000||50%
Source: EITC Outreach
It’s important to note that, unlike the 2020 tax year, the childcare tax credit for 2021 phases out based on adjusted gross income (AGI). It becomes 0% for an AGI of $438,000 or more.
If you give $20 and a pizza to your 18-year-old son for watching his younger brother and sister while you went out for a little “me” time, that doesn’t count. It’s not a qualified expense for the childcare tax credit. You can’t claim expenses paid to siblings 18 or younger, or your spouse, or any dependents listed on your tax return. But here are some expenses that do qualify for the childcare tax credit:
- Childcare provided by a babysitter or licensed dependent care center.
- Before- and after-school care for children under 13.
- Education costs below the kindergarten level, including nursery school.
- Summer or day camps that provide care while the parents are working, including sport- or activity-specific camps (but not overnight camps).
- Costs of a cook, housekeeper, or maid who takes care of the child.
- Nurse and home care providers for a disabled dependent.
So the next time you get that tuition bill in your child’s schoolbag or you see that morning care auto-debit charge appear on your card statement, make a note to get their federal tax ID number and keep it handy for tax time.
The childcare tax credit cannot be used for expenses that were reimbursed by your employer or that you paid with pre-tax dollars.4
But the feds are not alone in supporting childcare. Childcare tax credits are also available from about two dozen states, and many of those are refundable tax credits. A refundable credit is one that can still get you money back even after the tax you owe goes down to zero. The federal childcare tax credit, historically nonrefundable, is for the first time fully refundable for 2021 per the ARP. An interactive U.S. map is provided by the Tax Credits for Workers and Their Families (TCWF) initiative. You hover your cursor over a state, and it tells you whether certain credits, including the childcare tax credit, are offered by that state.5
You will need to fill out Form 2441 to claim the childcare tax credit.6 Most major tax preparers and filing services provide online tools to help you figure out if you qualify for the credit. Just answer a few of their questions, click submit, and you’re on your way.
The childcare tax credit allows working parents to claim certain childcare expenses, such as daycare, on federal and state returns to help offset the cost. It also can offset expenses for dependent care. The credit varies based on income level and phases out completely for incomes of $438,000 and above.