What Is the Child and Dependent Care Credit?
The child and dependent care credit is a tax credit offered to taxpayers who pay out-of-pocket expenses for childcare. The credit provides relief to individuals and spouses who pay for the care of a qualifying child or disabled dependent while working or looking for work. The percentage of eligible expenses that qualify for the tax credit varies depending on the taxpayer’s income level, and there is a limit on the total dollar amount of expenses that qualify.
The American Rescue Plan Act of 2021, enacted March 11, 2021, made significant changes to the credit that made it more generous and potentially refundable—meaning you no longer have to owe taxes to claim the credit.
- The child and dependent care credit helps you pay for the care of eligible children and other dependents (aka "qualifying persons").
- The credit is calculated based on your income and a percentage of the expenses you incur for the care of a qualifying person while you work or look for work.
- In addition to daycare, you can claim expenses for babysitters, day camps, and before- and after-school programs.
- The American Rescue Plan Act of 2021 made the credit substantially more generous and potentially refundable.
Understanding the Child and Dependent Care Credit
You might be able to claim the child and dependent care credit if you paid someone to care for a "qualifying person" so you could work or look for work. According to the Internal Revenue Service (IRS), a qualifying person for the credit is:
- Your dependent child who was under age 13 when they received care; or
- Your spouse who is physically or mentally incapable of self-care and lived with you for more than half of the year; or
- Someone who is physically or mentally incapable of self-care, lived with you for more than half of the year, and either (1) was your dependent, or (2) could have been your dependent except they received $4,300 or more in gross income, filed a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on someone else's tax return.
A person is considered physically or mentally incapable of self-care if they're unable to dress, clean, or feed themselves or need another person's full-time attention to stay safe or keep others safe.
Unlike deductions, tax credits represent a dollar-for-dollar reduction in one’s tax liability. The credit equals a percentage of work-related expenses you paid someone to care for your child or another qualifying person. For 2020, the percentage ranged from 20% to 35% of your allowable expenses, depending on your earned income and adjusted gross income (AGI). The credit started to decrease if your AGI exceeded $15,000.
You could claim up to $3,000 of paid expenses if you had one qualifying person or up to $6,000 for two or more individuals. So, the maximum credit for 2020 was $1,050 for one qualifying person (35% of $3,000) and $2,100 for two or more people ($35% of $6,000).
Changes to the Child and Dependent Care Credit for 2021
The American Rescue Plan made several important changes to the child tax credit for the 2021 tax year only. Specifically, the law:
- Increased the child tax credit from $1,050 to $4,000 for one qualifying person and from $2,100 to $8,000 for two or more qualifying individuals
- Increased the maximum credit from 35% to 50% of the taxpayer's work-related child and dependent care expenses
- Raised the income level at which the child tax credit begins to phase out from $15,000 to $125,000
- Made the credit fully refundable for people who live in the U.S. for at least half of the year
You can now claim up to $8,000 of paid expenses for one person and up to $16,000 for two or more. That means the maximum credit for 2021 is $4,000 for one qualifying person (50% of $8,000) and $8,000 for two or more people (50% of $16,000).
The new rules also mean that every eligible taxpayer with an AGI of $125,000 or less will get a credit worth 50% of their qualifying expenses. As AGI climbs, the percentage is gradually reduced from 50% to 0%. For example, if your AGI is between $173,000 and $175,000, your credit will be worth 25% of your qualifying expenses. If your AGI is $438,000 or higher, you won't get the credit.
The maximum credit is 50% for taxpayers with AGIs of $125,000 or less. The percentage drops by one point for every $2,000 of AGI over $125,000 and completely phases out at $438,000.
Remember that because the credit is now fully refundable, you could receive a refund even you don't owe any taxes. For example, if you owe $1,000 in taxes and can claim a credit for $2,000, you could receive a $1,000 refund. Previously, the credit was non-refundable—meaning it could reduce your taxes to $0 but not provide a refund, and any credit amount that remained was automatically forfeited.
How To Claim the Child and Dependent Credit
To claim the credit, you must complete Form 2441 and include it with your Form 1040. You're required to provide a valid taxpayer identification number (TIN) for each qualifying person (generally the person's Social Security number). You'll also have to identify the people and organizations that provided care for your child, spouse, or dependent—including their names, addresses, and TINs.
If the care provider information you provide on your tax return is incorrect or incomplete, you may not be allowed to claim the credit. You can use Form W-10 to request a provider's name, address, and taxpayer identification number (TIN).
To support your claim for the credit, keep records for your work-related expenses. Also, if your dependent or spouse can't take care of themselves, be sure your records show the nature and length of the disability.
Who Can Claim the Credit?
To claim the credit, you or your spouse must have earned income—that is, money earned through employment—and you must have paid for the care so you can work or search for work. Married spouses need to file a joint return to claim the credit or show they meet special requirements listed in IRS Instructions for Form 2441.
The IRS allows a fairly wide range of expenses, including those for:
- Babysitters, as well as housekeepers, cooks, and maids who take care of the child
- Day camps and summer camps (overnight camps are not eligible)
- Before- and after-school programs
- Nurses and aides who provide care for a dependent who is disabled
- Nursery school or preschool
Child support payments don't count as qualified expenses for the child and dependent care credit. Nor do payments you made to someone you or your spouse can claim as a dependent, your child who was under age 19 at the end of the year (even if they aren't your dependent), your spouse, or a parent of your qualifying person if the qualifying person is your child and under age 13.
While working parents can claim educational expenses at the pre-K level, costs related to kindergarten and above do not qualify. Similarly, costs related to summer school or tutoring are not eligible for the credit.
There are special rules for divorced parents. The custodial parent is eligible to take the child and dependent care credit, whether or not the other parent claims the child (or children) as a dependent on their tax return. According to the IRS, the custodial parent is the one who had the child the greater number of nights in the tax year. If both parents shared an equal number of nights, it is the one with the higher AGI. More details are available on page 4 of IRS Publication 503.
Except under limited circumstances, the caregiver may not be a member of your immediate family. Specifically, the person providing care can't be your spouse or the parent of a child under age 13 whose care you are paying for—nor can it be your child under the age of 19 or your dependent for tax purposes.
Child and Dependent Care Credit vs. Flexible Spending Account
You may not use the child and dependent care credit for expenses that were reimbursed by your employer or that you paid with pretax dollars, including funds held in a flexible spending account (FSA).
In some cases, using an FSA—if one is available through your employer—provides a larger tax benefit. That’s particularly true for those in higher tax brackets, for whom the ability to pay with pretax dollars represents bigger tax savings.
The American Rescue Plan increased the 2021 dependent care FSA contribution limit to $10,500 for single filers and couples filing jointly (up from $5,000 in 2020) and $5,250 for married couples filing separately (up from $2,500 in 2020). This increase was a one-time exception implemented by the American Rescue Plan; in 2022, the limit will revert to $5,000 for single filers and couples filing jointly. Money in these FSAs is withheld from your paycheck on a pretax basis and placed into a non-interest-bearing account that you can use for eligible expenses.
Who Qualifies for the Child and Dependent Care Credit?
You can claim the child and dependent care credit if you paid a person or an organization to care for a qualifying person. A qualifying person is a dependent under the age of 13 (e.g., your child) or a dependent of any age or your spouse who can't care for themselves and lives with you for at least half of the year.
How Much Can I Claim for the Child and Dependent Care Credit?
For 2021, you can claim the credit for up to $8,000 of expenses for one qualifying person or $16,000 for two or more people. The percentage of expenses you can claim ranges from 0% to 50%, depending on your AGI. You can claim the maximum percentage (50%) of expenses if your AGI is $125,000 or less. So, for example, if your AGI is $75,000 and you had $8,000 of expenses for one qualifying person, the tax credit would be worth $4,000 (50% of $8,000). The tax credit starts to phase out if your AGI is above $125,000 and disappears entirely at AGIs above $438,000.
How Do I Claim the Child and Dependent Care Credit?
To claim the credit, fill out Form 2441 and include it with your federal tax return. You must include a valid taxpayer identification number (TIN) for each qualifying person, as well as the names, addresses, and TINs for the people and organizations that provided care for your child, spouse, or dependent.