This tax season, an often-overlooked tax credit could put up to $8,000 back in families’ pockets.
Thanks to a temporary change codified in the American Rescue Plan, parents or guardians can now claim a maximum credit of $4,000 (50% of $8,000 in expenses) for one child, and $8,000 for two or more children (50% of $16,000 in expenses). And for the first time, the credit will be fully refundable in 2021, so you can still receive money back even if you don’t owe anything.
Although this change is new, the child and dependent care credit aren’t. The credit was first established in 1976 to help reduce the financial burden of paying for child care. It’s a helpful tax credit for many families any year but it may benefit families dealing with reduced salaries from the coronavirus pandemic.
Who Qualifies for the Child and Dependent Care Credit?
Generally, you can claim this credit if you pay for childcare for a kid under 13. Types of care that qualify include daycare, babysitters, and nannies. You may be able to claim the credit if you file as single, married filing jointly, head of household, or you’re a qualifying widow(er), and married filing separately typically won’t qualify for the credit.
Let’s say you paid $6,000 in childcare expenses for your child; you can get a credit of $3,000 (50% of $6,000).
Generally, taxpayers and their spouses who are filing jointly must have some earned income during the 2021 tax year and paid expenses for child care for either parent to work or look for a job. There’s no minimum income threshold to qualify for the credit.
As it’s the child and dependent care credit, care for an adult may also qualify.
“A qualifying person can also be certain individuals who physically or mentally aren’t able to care for themselves and live with the taxpayer for more than half of the year,” says Jonathan Curry-Edwards, principal and a leader of the private client tax services team at Friedman, a New York-based accounting firm.
The IRS has a quiz that you can complete to see if you may qualify for the credit.
How Much Is the Child And Dependent Credit Worth?
For 2021, you can deduct a maximum of $8,000 of expenses for one child or dependent or $16,000 for two or more children. Taxpayers may qualify for the tax credit up to 50% of qualified expenses if their adjusted gross income (AGI) is less than $125,000.
However, above $125,000, the credit decreases as your AGI increases. The credit is completely eliminated for any taxpayer with an AGI above $483,000.
The Employer Identification Number (EIN) for the care provider must be reported when claiming this credit. Although you might still be eligible for the credit even if you can’t get this information; you must be able to prove to the IRS that you attempted to find and provide this information.
Keep in mind that if you pay your child care provider under the table, you won’t be able to claim the credit without documentation.
Is the Child and Dependent Care Credit Refundable?
Yes. For the first time, the credit is fully refundable for 2021, which means it can create a refund if you don’t owe any taxes.
Tax credits like the child and dependent care credit can be more beneficial to people because they lower the amount of taxes you have to pay each year. This is different from a tax deduction, which can reduce how much of your income you are taxed. It may lower your tax rate, resulting in you paying less tax, but a tax credit is a dollar-for-dollar reduction of the taxes you have to pay.
Read the entire Forbes article for information on forms to apply, and common mistakes taxpayers make.