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Part of the Series Tax Deductions and Credits GuideUnderstanding Tax Breaks
Tax Credits for Parents/Students/Dependents
Tax Deductions for Real Estate
Tax Deductions for Retirement Savings
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. Those changes, however, only lasted for one year - so that for tax years 2022 and onward the credit reverts back to its previous form.
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:
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.
The child and dependent care credit differs from the child tax credit.
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. The percentage ranges from 20% to 35% of your allowable expenses, depending on your earned income and adjusted gross income (AGI). The credit starts to decrease if your AGI exceeds $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).
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.
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.
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 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:
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.
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.
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 and onward, the limit reverts back 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.
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.
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.
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.