Can You Claim the Child and Dependent Care Credit?

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If you've never taken advantage of the Child and Dependent Care Credit on your federal tax return, maybe it's time for you to take another look. The benefits have been drastically increased and could give you a huge tax break.

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What Is the Child and Dependent Care Credit?

The Child and Dependent Care Credit is intended to help working parents pay for the cost of daycare, after-school programs and day camps. The purpose is to enable someone to go to work or to look for work.

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It is a refundable credit that can be used to reduce your federal income tax liability. If the credit exceeds the amount of taxes you owe, you could receive money back as a tax refund.

The Child and Dependent Care Credit has been around since the 1970s but has gotten supercharged by the American Rescue Plan Act. The maximum amount of qualifying expenses has been increased from ​$3,000 to $8,000​ for one qualifying individual and from ​$6,000 to $16,000​ for two or more qualifying persons. The amount you can deduct depends on your income level.

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Consider also:Child and Dependent Care Credit Requirements & Qualifications

What Are the Benefits?

The amount of the dependent care tax credit is ​50 percent​ of dependent care expenses. If you have ​$8,000​ of qualifying child care expenses, you could receive a maximum credit of ​$4,000 ($8,000 times 50 percent).

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The amount of the credit decreases when your adjusted gross income (AGI) goes over ​$125,000​. The percentage goes to zero if your AGI exceeds ​$438,000​.

The amount of your credit cannot be more than your earned income for the year if you are single. If you are married, the amount of the credit cannot exceed the smaller of you or your spouse's earned income for the year.

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To claim the credit, you'll need to fill out IRS form 2441 and attach it with your federal income tax return.

How to Qualify

You must have paid a qualifying person in 2021 to take care of a dependent or child.

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A qualifying person could be:

  • A qualifying child under the age of 13 at the end of the year and you claimed as a dependent on your tax return
  • Your spouse, if that person cannot take care of themselves and has lived with you for at least six months of the year
  • Any other person that you claimed as a dependent but can't take care of themselves and has lived with you for at least half of the year.

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People Ineligible to Pay for Care

You can't pay:

  • Your spouse to take care of your child.
  • The parent of a child. You can't pay your ex-husband or ex-wife to take care of children you've had together.
  • Anyone you claimed as a dependent on your tax return.
  • One of your own kids, 18 or younger, to take care of their siblings.

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Consider also:How to Use a Dependent Care Savings Account

Additional Requirements

Both you and your spouse must have earned income. Generally, earned income is considered as wages or salaries from a job, but it could also be net income from self-employment. The IRS treats a spouse who is a full-time student or is unable to take care of themselves as having earned income.

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Additional requirements mean that you must:

  • Pay for the dependent care so you could work a job or look for a job.
  • File a joint return if you're married. However, if you're legally separated or living apart from your spouse, you may still be able to claim the credit when you're married filing separately.
  • Provide the name, address and taxpayer identification number or Social Security Number of the care provider.

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How to Claim the Credit

To claim the credit, you'll need to fill out IRS form 2441 and attach it with your federal income tax return.

What About Next Year?

The benefits from the American Rescue Plan are only valid for the 2021 tax year. The benefits for 2022 will return to their previous levels.

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