AMERICAN RESCUE PLAN

Child and dependent care tax credit 2021: how to claim $8,000 or $16,000

The American Rescue Plan greatly expands the amount of expenses for child care, so that you can work, which you can write off on your 2021 tax return.

Child and dependent care tax credit 2021: how to claim $8,000 or $16,000
Mark Brown AFP

Many Americans that need to incur expenses to have their children or loved ones looked after while they go out to earn a living will want to keep track of those expenses in 2021. The Child and Dependent Care Credit (CDCC) has been increased to allow for taxpayers to write off expenses of up to $8,000 for one child or dependent and $16,000 for two or more.

Now you won’t get all of those expenses removed from any tax burden you have at the end of the year, but taxpayers can now claim up to 50 percent of those expenses in the credit and for some who have no income but “work” will now be eligible.

How does the Child and Dependent Care Credit work?

The math can seem a little confusing but here are the basics:

Individuals or households with earnings up to $125,000 will be able to claim 50 percent of up to $8,000 paid toward having their one child or dependent cared for, so a credit of $4,000. And it will be fully refundable, which means that if you owe less in taxes than the amount of the credit you can claim, you will receive the excess as a tax refund.

So let’s say you owe $2,000 at the end of the year, you will receive a tax refund of $2,000. If you have two or more children the amount of expenses you can claim doubles to $16,000, and the maximum refundable credit to $8,000.

Also, just for this year, if you earn less than the credit you are claiming you can still receive the credit. This is an important change for 2021 in the American Rescue Plan, where for example, if one spouse is a full-time student with no income, the married couple can still get the credit.

Households can receive some tax credit for incomes up to $438,000

Above the $125,000 threshold the credit amount begins to phase out by one percent off the starting 50 percent for every $2,000, or fraction thereof, over the threshold. So if you earn $130,000 you can only claim 47 percent of your expenses related to care for your child or dependent. The percentage drops to 20 percent when income reaches $183,000.

That 20 percent of expenses you can claim as the credit lasts until household income reaches a maximum of $400,000. Above that threshold the credit again starts to phase out until any amount over $438,000 will reduce the credit to $0. This calculation applies only to the 2021 fiscal year.

Employer based dependent care assistance increased

The maximum amount of dependent care assistance that can be excluded on your W-2 will increase to $10,500 if you’re single and $5,250 if you are married but file separately. This is up from the $5,000 and $2,500 respectively which the credit will revert back to in 2022 if no further legislative action is taken.

How to claim the Child and Dependent Care Credit?

Those that qualify for the credit need to file out a Form 2441, Child and Dependent Care Expenses. Next Spring you will need to include the 2441 form with your tax return when you file in 2022 to claim the enhanced credit. Many tax processing software will walk you through the process as well, but you will need to keep track of qualifying expenses and have the receipts to back up the expenses you want to write off.

Generally, your local neighborhood baby sitter won’t qualify unless he or she is on the up-and-up with the IRS and can give you an invoice. Also, the cost of overnight camps or private education don’t count. However, costs for before-school and after-school programs can qualify along with that of domestic help so long as part of the costs go toward the care of a qualifying individual. And of course, day-care center, nanny, or nursery school costs should qualify.

If you received dependent care benefits from your employer, you must complete Part III of Form 2441. Any amounts that you received will be shown on your W-2 form.