The American Rescue Plan Act passed in March 2021, giving the child and dependent tax credit (CDCC) a boost. This credit is not the same as the child tax credit (CTC). The CDCC allows families to claim more child care expenses on their tax returns. We compiled some common questions about the CDCC—learn how you can get more money back on your 2021 tax return:
– What is this child care credit about?
The new law passed by Congress in March made it fully refundable, meaning families will likely receive money back even if they don’t owe taxes. Before, filers could claim up to $3,000 per child for a maximum of $6,000 for child care expenses. The credit now covers up to $8,000 for eligible child care-related expenses for one child or dependent and $16,000 for two or more qualifying dependents. Keep records of your dependent care expenses for when you file your 2021 tax return.
– Who qualifies for this credit?
You must have earned income during the year to claim the credit. If you filed a joint return with your spouse, you both must have earned income. If you are married, you must file a joint return. You can file to claim the CDCC regardless of your income. The amount received does get smaller at higher incomes but doesn’t go away completely.
– Who can I claim as a dependent?
For the CDCC you can claim:
Each child 12 or younger (at the end of the year)
Your spouse (if they cannot care for themselves and have lived in your home for at least half the year—this also applies to any other individual who lived with you, like a cousin or grandparent)
– How many children can qualify for this?
You can claim as many children dependents as you have. Families can claim several dependents (including adult individuals who live in your home cannot care for themselves), but the credit is capped out at $16,000 for two or more eligible dependents.
– If I pay a family member to take care of my children, can I qualify?
Possibly. Financial planner Sallie Mullins Thompson told CNBC that the “childcare provider has got to be an operating functional business.” To claim the CDCC credit, the IRS requires those filing to fill out a W-10 form and include each provider’s name, address and taxpayer identification number (TIN). If the care provider is an individual, the TIN is the provider’s social security number or individual taxpayer identification number (ITIN). If the care provider is an organization, then it is the employer identification number (EIN). The following people cannot be claimed as providers for the credit:
– Your spouse
– A parent of the child being cared for (in case of divorce, etc.)
– Anyone listed as a dependent on your tax return
– Your own child age 18 or younger, regardless of whether he or she is a dependent on your tax return (you can’t pay your 17-year-old child to care for an 8-year-old sibling and claim the credit)
– If the person who takes care of my children has an ITIN, can I qualify?
Yes, the IRS accepts ITINs for individual providers. Each provider needs to fill out a W-10 form and include their name, address and ITIN.
– What expenses don’t qualify for the Child and Dependent Care Credit?
The following expenses don’t qualify:
- Costs for transportation to and from the childcare facility
- Overnight camp expenses
- Education expenses for your child in kindergarten or higher
- Expenses for chauffeur or gardening services
- The cost of before or after school programs might qualify if the program cares for the child (extracurricular camps for sports or art may not qualify). Education costs below kindergarten qualify if you can’t separate them from your childcare expenses. This includes nursery school.