American families pay between $8,000 and $10,000 per child for annual childcare expenses, a 2021 Treasury Department report, citing data from Child Care Aware of America, found. But this year, parents and other eligible carers can get a big tax break on care costs.
The Child and Dependent Care Credit, a tax credit for parents and other caregivers with eligible dependents, has more than doubled in 2021 thanks to the American Rescue Plan. This is similar to the expanded child tax credit under the American Rescue Plan, which was also a temporary expansion for the 2021 tax year.
The Expanded Child and Nursing Loan allows eligible taxpayers to apply for a loan of up to $4,000 toward care expenses for one qualifying dependent or $8,000 for two or more dependents.
Here’s what you need to know about extended credit, eligibility, and filing for this year’s tax return.
What is the extended child and care loan?
The Child and Dependent Care Credit is a tax credit for expenses you paid to care for a dependent — like a babysitter or daycare — that enabled you to work, look for work, or attend school.
This year, you can claim up to $8,000 in expenses for one dependent or $16,000 in expenses for two or more dependents and receive a credit of up to 50% of those expenses. The credit begins to expire after you reach $125,000 in Adjusted Gross Income (AGI), and those with an AGI over $438,000 are not eligible.
Previously, the Child and Dependent Care Credit allowed taxpayers with dependents to claim up to $3,000 in care expenses for one eligible dependent and $6,000 for two or more dependents. And instead of getting up to 50% back, you could get up to a 35% return on care costs — up to $1,050 for one loved one and up to $2,100 for two or more loved ones.
Another big difference with the enhanced balance is that it’s refundable for the first time, says Duke Alexander Moore, a registered agent and founder of Duke Tax Online. A non-refundable credit, like the Child and Dependent Care Credit before it, is only deducted from your tax liability. That means if you owe less in taxes than the loan is worth, you may not get the full amount you qualify for. On the other hand, you can get the full refundable credit even if the credit is worth more than you owe – you’ll get the rest as a refund.
Who is entitled to the child and care loan?
There are a few criteria that you must meet in order to be eligible for the child and care loan. First, the credit specifically relates to dependent care expenses that you paid to enable you to work, look for work, or go to school. As a result, you must have earned income from work. There are some exceptions, e.g. B. if you were a full-time student. According to Moore, however, other forms of income (such as child benefit or unemployment benefit) do not count.
And if you are married together, both spouses must have earned income. If one spouse works but the other doesn’t work, isn’t looking for a job, and isn’t attending school at least half the time, you don’t qualify, says Joshua Giminez, a certified public accountant and founder of Fair Winds Tax & Finance in Columbus, OH.
Eligible Dependents
To be eligible for the credit, you should also have an eligible dependent for whom you have paid care expenses. The IRS defines a qualifying dependent as:
- Someone under the age of 13 whom you can claim as a dependent.
- A spouse who is unable to take care of themselves and has lived with you for more than half the year.
- Someone who is unable to take care of themselves and whom you can claim as a dependent.
- Someone unable to support themselves who you could claim as a dependent unless their income was over $4,300.
- Someone unable to take care of themselves who you could claim as dependent unless they have filed a joint statement.
- Someone who is unable to look after themselves and whom you could claim as a dependent other than you can be claimed as a dependent on someone else’s return.
You can use the IRS’s Interactive Tax Assistant to see if your dependent qualifies before filing. You will need your loved one’s birthday and your enrollment status to verify this.
qualifying care
The IRS also has guidelines for the types of care covered under the loan. Qualifying services may be provided inside or outside your home, but child support payments are not eligible.
If you or your spouse cared for your child, you won’t be able to claim the loan, Moore says. You also don’t qualify if you have another dependent, e.g. B. An older sibling caring for the eligible dependent.
And remember, the credit is for dependent care expenses so you can work, look for work, or go to school. This means that care expenses during your volunteer work or non-work-related events – like dinners or errands – don’t count.
Types of qualifying nursing services include:
- after school care
- Assistance with activities of daily living – such as eating and helping with personal hygiene
- baby-sitter
- warehouse
- day care centers
- Nanny or nanny share arrangements
- preschool
Here are some examples of qualifying spend:
- You and your spouse work, and you pay to care for your 4-year-old child for the hours that you both work.
- They are only actively looking for work three months a year and pay for care services during this time. You are entitled to the costs paid during this period.
- You work three days a week but pay for five days of childcare for your 7-year-old. You are entitled to expense allowances for the three days per week that you work.
pro tip
You may be able to claim childcare costs from 2020 that you paid in 2021. The loan works on a cash basis, which means that all childcare services paid in 2021 are eligible for the child and care loan.
How much can you expect from the child and care allowance?
The credit is based on your income and a percentage of the care expenses you paid in 2021. This year, you can claim up to $8,000 in paid care expenses for one eligible dependent or up to $16,000 for two or more.
If you qualify for the full credit, which is 50% of your qualifying expenses, that means you can receive up to $4,000 for one eligible dependent and up to $8,000 for two or more eligible dependents from your tax refund.
But the credit begins to expire after you reach $125,000 in adjusted gross income. For every $2,000 above an AGI of $125,000, the loan amount decreases by 1%. For example, if your AGI is between $125,000 and $127,000, you can claim 49% of your qualifying spend. If your AGI is $180,000, you can claim 22% of your qualifying spend. If your AGI is over $438,000, you are not eligible for the credit at all.
Here is the complete Child and Dependent Care Loan Ending Schedule from the IRS
How can you apply for the child and care loan?
You can apply for the Child and Dependent Care Credit by attaching Form 2441 to your tax return.
You will need the tax identification number or social security number for each eligible dependent, as well as the name, address, and TIN or employee identification number of the person or organization caring for your dependent. Moore says you can find this information by using the Dependent Care Provider Identification and Certification Form, also known as the W-10. If your care provider’s information is incorrect or incomplete, your loan may be denied, the IRS says.
You should also provide a copy of all documents related to dependent care expenses when filing, including receipts for payment.
If you’re filing tax software yourself this year, be sure to include Form 2411 and Form W-10 with your tax return. If you’re filing using tax prep software or working with your tax professional, research dependent qualification questions and make sure the form — and your accurate information — is included in your return before filing to avoid delays.
0 Comments