Originally published as part on 03/11/2021 as part of the American Rescue Act. Updated 12/30/2021.
Dependent Care Credit offers families with child care and dependent care expenses up to $8,000 per family in a fully refundable credit. Although the program existed previously, it has been expanded and made more valuable for 2021.
Note: Some aspects might be relevant to ensure before the end of 2021.
In order to be eligible, you (and spouse, if married filing jointly) must both have earned income during the year. You must have paid for care so that you could work (or look for work). Being a full-time student counts as having earned income for the purposes of this credit, even if you don’t receive any income for studying.
We’ve outlined some key highlights here. For full details, see the IRS guidance linked below or speak to your accountant.
How to Apply
You apply for the credit as part of filing your 2021 tax return (using form 2441)
For each childcare provider you will need:
- Name
- Address
- EIN or SSN (unless it’s a tax-exempt provider). If you don’t have the Tax ID, you can still apply, if you used due diligence to get it.
Remember: providers can include a school, a babysitter, or a relative, such as a grandmother.
Eligible Dependent Care Expenses
The amount you get as a refund is 50% of eligible expenses that you paid for child and dependent care expenses during 2021.
Childcare for children under 13 years old is an eligible childcare expense.
For children below kindergarten age, the cost of the full day of childcare (e.g. preschool) is an eligible expense.
For children in kindergarten or a higher grade, full-day childcare (e.g. school) is not an acceptable expense. However, expenses for before – or after- school care is acceptable (something to look into if your child’s school offers early -or after- school care).
The cost of sending your child to an overnight camp isn’t considered a work-related expense. The cost of sending your child to a day camp is an acceptable expense.
Eligible disabled dependents can include caring for senior parents or for a disabled member of the family who is older than 13 years old.
Further Details
- Fully Refundable: Credit is fully refundable (instead of just a credit for taxes owed.
- 50% Credit: The credit refunds 50% of expenses paid (instead of up to 35%)
- Up to $8k Credit:
- Up to $4,000 if you paid for care for one eligible dependent.
- Up to $8,000 if you paid for care for two or more eligible dependents.
- Minimum Income: If you are married filing jointly, you cannot claim more dependent care expenses than the total amount that the lower earner earned in 2021.
- Student Eligibility: If you are a full-time student for at least 5 months of 2021, you will be treated as having earned income of $250/month for any month that you are a full-time student if you have one dependent, and $500/month if you have 2+ dependents. If both spouses are full-time students in a given month, the above still applies (income is considered $250/$500 per month in total for both spouses).
- Unable to Care for Oneself: If a spouse is mentally or physically incapable of caring for themself, they are treated as a full-time student for any month that they are not capable to care for themselves and are considered to have an earned income of $250/$500 per month just like a full-time student above (#5).
- Maximum Income: Couples earning up to $125,000 (instead of up to $150,000) are eligible for the full 50% credit. For each $2,000 in income over $125k, the credit is reduced by 1% (49% instead of 50% etc). Once your available credit goes down to 20%, it stays at 20% up to an annual income of $400,000, at which point the couple is no longer eligible.
- Non-US residents: Americans that have lived in the USA for less than 6 months of 2021 can still be eligible for the credit, but only as a credit for taxes owed, not as a refund.
Eligible only part of the year: If you only worked (or looked for work) part of the year, then you can only include expenses for that period. Working part time is fine, and if you have to pay a fixed rate for childcare for the week, you can get credit for the full amount, even if you didn’t work all the days that you paid for childcare. - Incurred and paid in 2021: You must have incurred the dependent care expense AND paid the bill in 2021.
- If you incurred childcare costs in 2021, and you pay in 2022, you can’t use that expense to calculate your 2021 credit (you’ll likely be able to claim it for 2022 though).
- If you prepay for 2022 childcare, you can’t use that expense to calculate your 2021 credit.
- If you paid for 2020 childcare costs during 2021, you can get additional credit at 20% rather than 50% credit.