How to get thousands back from expenses with the child and dependent care tax credit - CNET

You can claim the credit for care expenses regardless of your income. 

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Your family may already know about the money you may receive starting this July from the advance child tax credit payments. (calculate your total here.) But did you know that as part of the American Rescue Plan families can also write off a higher amount of expenses associated with the overhead of caring for a child or a dependent with disabilities? These eligible expenses include things like day care, babysitters and transportation. 

If you qualify, you could receive up to 50% back in a refund for these child care-related expenses. The amount you'll be able to claim maxes out at $8,000 for one dependent and $16,000 for two or more. The catch? You need to start gathering information now to make sure you don't miss out on any money when you file your income tax return next year. 

We'll spell out how these child care tax credits work. We've also made some suggestions on how you might use the extra money and what to know about the IRS child tax credit portals. Also, if you or someone in your household received unemployment in 2020 during the pandemic, read more about how to get a tax refund on that money. This story was updated recently. 

What to know about the child and dependent care credit

The child and dependent care credit is a tax break designed for parents to claim expenses from child care. For example, if you're working and paying for a day care provider now, that expense can be claimed when you file your taxes in 2022.

How is credit different in 2021? In previous years -- including tax year 2020 -- the maximum amount you could claim for multiple children was $6,000. Under the new stimulus law, you'll be able to claim up to $16,000 in child care expenses for multiple children and up to $8,000 for one child or dependent alone.

What does that mean? In short, for the 2021 tax year, you could get 50% back for up to $8,000 of child care and similar expenses (and up to $16,000 of expenses for two or more dependents).

Before the American Rescue Plan, the child and dependent care credit was nonrefundable, meaning it could reduce your tax bill to zero but you would not receive a refund on anything left over. Now, the credit is fully refundable, meaning that you will receive money for it even if you don't owe taxes. 

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What counts as an eligible expense?

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 providing care for your dependent is counted as long as you're paying them. (So that doesn't include your spouse, for example.)

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 a nursery school, rather 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 expenses on your taxes in 2022

You won't actually claim the credit until you file your 2021 taxes next year. 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, when tax day approaches in 2022, 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, those programs may ask if you have a child under age 13 and if you paid for child care during the year.

Keep detailed and organized records of all expenses and receipts to show the IRS next year. 

Sarah Tew/CNET

How much in expenses can be claimed per dependent 

For expenses accrued in 2021, you can claim up to $8,000 in eligible expenses for one dependent or up to $16,000 in eligible expenses for multiple dependents, according to Garrett Watson, senior policy analyst at the Tax Foundation. 

Keep in mind that this is different credit than the 2021 child tax credit. The advance child tax credit payments will start in July on a monthly basis. In that case, you can get between $500 and $3,600 per child over the course of this year and next. 

What to know about income limits and rules for parents 

To qualify, you must have earned income, such as wages from a job or unemployment. If you are married and filing a joint tax return, your spouse must also have earned income. (Exemptions apply to full-time students or those who are receiving disability.)

For the 2021 tax year, the credit amount begins to phaseout when the taxpayer's income or household AGI, or adjusted gross income, reaches $125,000. The credit is decreased by 50% for any amount between $125,000 and $183,000, where it is then phased out to 20%. This 20% lasts until the income reaches $400,000. The credit rate eventually completely phases out for families earning $438,000 or more.

What to know about eligibility for dependents

According to the IRS, qualifying rules for dependents are fairly broad, but they must fit one of the following criteria: 

• 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, or
• Be physically or mentally incapable of self-care -- even if their income was $4,300 or more 

In addition, the qualifying dependent must have a tax identification number, such as a Social Security number.

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What separated and divorced parents need to know 

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. 

For more ways you'll get money this year, here's how you could save money with credits and benefits in 2021. Also, here's how to opt out of the monthly child tax credit payments.

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