More Americans may qualify for the Child and Dependent Care Credit this year, thanks to temporary changes to the tax code.
The credit helps cover child care expenses you paid so you could work or look for a job. If you had expenses for an adult incapable of self-care, including your spouse or adult children, you may also be eligible for the credit.
The American Rescue Plan passed in March 2021 increased the allowable credit and made it fully refundable. It also increased the phase-out threshold. The changes are for this tax season only.
Here’s what to know.
Allowable credit has increased
The amount of allowable credit has increased substantially.
In the past, the credit was 35% of up to $3,000 in child care expenses for one dependent and $6,000 for two or more dependents. This year, the maximum percentage is 50% of up to $8,000 for one dependent and $16,000 for two or more dependents.
A dependent is considered a child under the age of 13 or an individual of any age who is incapable of self-care and lives with the taxpayer for more than half of the year. You will need a valid Taxpayer Identification Number (TIN) or Social Security number for each person you claim as a dependent for this credit.
The credit includes out-of-pocket expenses for preschool, day care, day camps, adult day care, and nanny-share arrangements. The care could be at home or outside your home.
To claim this credit, you need to complete Form 2441, Child and Dependent Care Expenses, and include it when you file your tax return. Additionally, you will need to identify all people or organizations that provided care using Form W-10.
The credit is fully refundable for this year
The credit this year is fully refundable. This means if the credit exceeds the amount of income tax you owe, you can still claim the full credit. Any credit in excess of your tax liability will be refunded to you.
“Taxpayers who had lower- to moderate-income and…no tax liability when they filed their tax return…never saw any benefit of this credit,” Manuel Dominguez, a senior tax research analyst at H&R Block, said in a webinar hosted by the National Consumers League (NCL). “But this year now that the credit is fully refundable, they can get the benefit of it.”
The credit is refundable only if you resided in the U.S. for more than half of the year. If you were deployed overseas as part of active military duty, you are still eligible.
Employer-provided dependent care benefits must be deducted
In the past, the more a taxpayer earned, the smaller credit you qualified for. Those making up to $15,000 in adjusted gross income (AGI) got the full 50% of expenses for the credit before it began to phase out.
Under the new law, the credit doesn’t begin to phase out until your AGI exceeds $125,000. The 50% credit decreases as your income rises above $125,000 and is unavailable for taxpayers with adjusted gross income over $438,000.
The maximum credit for employer-provided dependent care using the new 50% rate means taxpayers would be eligible for $4,000 for one qualifying individual, or $8,000 for two or more qualifying individuals. If you receive employer-provided dependent care benefits, like a flexible spending account, you must subtract those benefits from the allowable credit.
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda