You can get child care tax credits for expenses.Sarah Tew/CNET
While you may be looking ahead to the new child tax credit payments that are coming in July, did you know you can claim tax credits for child care expenses? It's called the child and dependent care credit and it's been temporarily expanded under March's American Rescue Plan Act.
These credits aren't the same as the revised child tax credit payments of up to $3,600. Instead, you can claim any qualifying expenses -- up to $16,000 -- related to child care, such as a daycare service or an in-home care provider you pay to watch your child while you're working. You can claim up to 50% of your expenses, depending on your income (we'll explain below).
We'll tell you everything you need to know about how the child care tax credits work. While you're here, use our child tax credit calculator to see how much you'll get and how to spend your money. Also, make sure you're eligible for the payments, as well as your dependents. Additionally, here's how to save up to $50,000 through one-time COVID credits and benefits in 2021.
What exactly is the child and dependent care credit?
The child and dependent care credit is designed for parents to claim expenses from child care throughout the year. For example, if you're working and paying for services such as daycare or a babysitter for your kids. These expenses can be claimed when you file your taxes each year.
How much you can get from the expanded child care credit has changed for expenses accrued this year. For instance, the max amount you could claim for multiple children in previous years has been $6,000. Under the new stimulus bill, you can now claim up to $16,000 in child care expenses for multiple children.
What counts as a child care provider?
Any organization or person that provides care for your dependent is counted as a child care provider as long as you're paying them. The IRS has relatively lax rules about care providers according to Elaine Maag, principal research associate at the Urban Institute. Here are some examples.
|What doesn't qualify|
|The dependent's parent|
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.
Claiming the child and dependent care credit may not be easy -- here's what to do now
You won't actually claim the deduction until you file your 2021 taxes next year (in 2022). For now, maintain a detailed account of all child care expenses -- that means any receipts you get from daycares or after-school programs showing expenses paid for. Then, you'll complete Form 2441 (PDF) and attach it to your Form 1040 tax return.
You'll need to report the name, address, and TIN (can be social security number or the employer identification number) of the care provider on your return, according to the IRS. 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, it may ask if you have a child under age 13 and if you paid for child care during the year.
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How much money can you claim per kid for the child care credits?
For expenses this year, under the American Rescue Plan Act, you can claim up to $8,000 for one child or up to $16,000 for multiple dependents, according to Garrett Watson, senior policy analyst at The Tax Foundation.
Normally, parents can only claim up to $3,000 for one kid or up to $6,000 for two or more kids.
Again, this is different from the 2021 child tax credit -- those payments start this year. You can get between $500 and $3,600 starting in July.
Is there an income limit to be eligible for the credits?
Yes, a household's adjusted gross income needs to be less than $125,000, Watson said. If your income exceeds that amount, your tax credits will phase out at 50%. For example, instead of getting $8,000, you'd now get $4,000. The credit rate phases down again to 20% for those with an AGI of $183,000, and remains 20% until the income reaches above $400,000.
The credit rate eventually completely phases out for those earning $438,000 or more.
With the original child care tax credits, the credit rates would phase down to 35% if the income exceeded $125,000 and 25% if the income exceeded $183,000.
Keep any receipts detailing child care you paid for.Sarah Tew/CNET
What are the qualifying rules for dependents?
They are fairly broad. In order to qualify, according to the IRS, dependents must:Be under age of 13, orUnable 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 -- you can claim the tax credits for them, orBe physically or mentally incapable of self-care -- even if their income was $4,300 or more -- andHave a tax identification number, such as a Social Security number.
Can more than one parent claim the tax credit? What about kids of divorced or separated parents?
No. The rules are similar to those governing the child tax credit: Only the parent who has primary custody can claim the child care tax credit.
If you're married, both parents need to work -- or be receiving unemployment benefits -- to be eligible for the credit, Maag said. Also, if you're in school, you can still get credit.
For more ways you'll get money this year, here's how you could save up to $50,000 through one-time COVID credits and benefits in 2021. Also, here's how to spend your child tax credit money and how to opt out of the monthly child tax credit payments.
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