If you’re paying someone to look after your kids or a dependent while you work, March’s stimulus bill lets you write off a big chunk of expenses related to that child or dependent care. That includes if you hire someone to care for your kid or a dependent, whether it’s for day care or a babysitter — or even for care-related transportation.
You could be eligible to receive up to 50% back as a tax break or refund for these 2021 child care-related expenses. The amount you’ll be able to claim maxes out at $8,000 for one dependent and $16,000 for two or more. The catch? You need to begin gathering your receipts and other monetary proof now to make sure you can claim the tax break when you file your income tax return next year.
We’ll lay out how this child care tax credit works below. Also, if you expect to benefit from the expanded child tax credits (monthly payments start in July), you may want to update your income and dependents’ information through the upcoming IRS portals. And if you or someone in your household received unemployment benefits in 2020, read about how to get a tax refund on that money. This story was recently updated.
What should I know about the 2021 child and dependent care credit?
The child and dependent care credit is a tax break designed mostly to let parents claim expenses from child care. For example, if you’re working and paying for a day care provider now, that expense can be claimed when you file your taxes in 2022.
How is the credit different in 2021? In previous years — including tax year 2020 — the maximum amount you could claim for multiple children was $6,000. Under the new law, you’ll be able to claim up to $16,000 in child care expenses for multiple children and up to $8,000 for one child or dependent alone.
What does that mean? In brief, for the 2021 tax year, you could get 50% back for up to $8,000 of child care and similar expenses (and up to $16,000 of expenses for two or more dependents).
Before the American Rescue Plan, the child and dependent care credit was nonrefundable, meaning it could reduce your tax bill to zero but you would not receive a refund on anything left over. Now, the credit is fully refundable, meaning that you will receive money for it even if you don’t owe taxes.
Child tax credit: Everything we know
What counts as a qualifying expense for the credit?
The law defines expenses based on child care providers, but there’s some wiggle room that also accounts for expenses like transportation. The key is that any organization or person providing care for your dependent is counted as long as you’re paying them. (So that doesn’t include your spouse, for example.)
The IRS has relatively relaxed rules about care providers, according to Elaine Maag, principal research associate at the Urban Institute. However, you may have better luck claiming child care credits for people and groups operating in an official capacity, like a nursery school, rather than giving a neighborhood teen $40 to watch your child for a couple hours.
Qualified care providers
|What qualifies||What doesn’t qualify|
|Day care expenses||Your spouse|
|Before- and after-school care programs||The dependent’s parent|
|Day camp||Your children|
|Transportation to and from care providers||Babysitters paid “under the table”*|
|Babysitters, nannies, housekeepers|
*Parents who pay their babysitters cash “under the table” should know it’s risky to claim the child care tax credits since the income may not be claimed or documented by the provider.
How can I claim the expenses on my taxes?
You won’t actually claim the credit until you file your 2021 taxes next year. For now, maintain a detailed account of all child care expenses — that means any receipts you get from day cares or after-school programs showing the expenses you paid for. Then, when tax day approaches in 2022, complete Form 2441 and attach it to your Form 1040 tax return.
According to the IRS, you’ll need to report the name, address and TIN (it can be a Social Security number or the employer identification number) of the care provider on your return. You can use Form W-10 to request the information you need from your care provider.
Note that the child and dependent care credit form is built into tax software like TurboTax and H&R Block. For example, those programs may ask if you have a child under age 13 and if you paid for child care during the year.
What is the maximum amount I can claim in expenses per child?
For expenses accrued in 2021, you can claim up to $8,000 in eligible expenses for one dependent or up to $16,000 in eligible expenses for multiple dependents, according to Garrett Watson, senior policy analyst at the Tax Foundation.
Keep in mind that this is a different credit from the 2021 child tax credit. The advance child tax credit payments will start in July on a monthly basis. In that case, you can get between $500 and $3,600 per child over the course of this year and next.
As a parent, what should I know about income requirements?
To qualify, you must have earned income, such as wages from a job or unemployment. If you are married and filing a joint tax return, your spouse must also have earned income. (Exemptions apply to full-time students and people receiving disability.)
For the 2021 tax year, the credit amount begins to phase out when the taxpayer’s income or household AGI, or adjusted gross income, reaches $125,000. The credit is decreased by 50% for any amount between $125,000 and $183,000, where it is then phased out to 20%. This 20% lasts until the income reaches $400,000. The credit rate eventually completely phases out for families earning $438,000 or more.
What should I know about eligibility for my dependents?
According to the IRS, qualifying rules for dependents are fairly broad, but a dependent must fit one of the following criteria:
- Be under the age of 13, or
- Be unable to care for themselves if 13 or older (for example, if you have a spouse or older dependent who is impaired and incapable of caring for themselves, and has lived with you for more than half the year, or
- Be physically or mentally incapable of self-care — even if their income was $4,300 or more.
In addition, the qualifying dependent must have a tax identification number, such as a Social Security number.
Stimulus plus-up payments: What you need to know
What should I know if I’m separated or divorced?
Only the parent who has primary custody can claim the child care tax credit. The rules are similar to those governing the child tax credit and shared custody.
For more ways you’ll get money this year, here’s how you could save money with credits and benefits in 2021. Also, here’s how to opt out of the monthly child tax credit payments.
The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.
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