Paying for child or dependent adult care is one of the largest monthly expenses many families face. But without care, parents may not be able to leave home to earn a living or go to school.
The IRS Child and Dependent Care Tax Credit (CDCTC) provides a tax credit of up to 50% (up to 35% for 2020 and before) of expenses you pay someone to care for your children or adult dependents, so it’s a little easier to pay.
However, several rules and exceptions make the tax credit a little more complicated than it seems.
- Your child and dependent care tax credit percentage ranges from 20% to 50% of what you spent on child care, up to $8,000 for one dependent or $16,000 for two or more dependents.
- In 2021, the American Rescue Plan temporarily increased these benefits due to the COVID-19 pandemic.
- Your applicable percentage depends on your adjusted gross income (AGI).
- There is no limit on how much you can earn and still qualify, but the percentage decreases in 1% increments as your earnings increase.
- In most cases, the credit applies to the care of dependent children under the age of 13 and adults unable to care for themselves.
How much is the child and dependent care credit worth?
The child and dependent care tax credit is typically 20% to 50% of day care expenses up to $8,000 for one dependent or $16,000 for two or more dependents. Any child whose care you claim must have been under the age of 13 at the time the care was provided.
The rate used to calculate the credit starts at 50% if your adjusted gross income (AGI) is $125,000 or less, then gradually decreases by 1% as your income rises to $183,001 – $400,000, at which point which your tax credit is 20%. Above $400,000 there is no credit eligibility.
In 2021, the American Rescue Plan temporarily increased the CDCTC benefit to help working caregivers during the COVID-19 pandemic. The limit of expenses that can be claimed has been increased to $8,000 for one dependent and $16,000 for two or more dependents. The maximum credit rate was also raised to 50%. This means a maximum benefit of $4,000 for one person receiving care and $8,000 for two or more. Families with incomes up to $125,000 are eligible for the full credit, after which the percentage of expenses you can claim gradually decreases until it is phased out.
How to qualify for the child and dependent care credit
You must have a dependent child or dependent adult who cannot be left alone while working, looking for work, or attending school full time because the person is unable to care for themselves. You must also have earned income during the tax year from a job or self-employment.
Your spouse must also be working, looking for work, or attending school if you are married, and therefore must not be able to stay home and care for you. Your spouse must also have income from work, but there is an exception if your spouse is disabled and unable to care for someone else.
You cannot claim this credit if you file a separate declaration of marriage, except in certain exceptional circumstances.
You may be able to get the child and dependent care credit even if your employer provides or subsidizes the cost of care.
Rules for your qualified dependents
Your child must have been under the age of 13 when the care was provided or, if over the age of 13, must have been physically or mentally incapable of self-care. You can claim adult care expenses for a dependent age 13 or older or for your spouse if he or she is physically or mentally unable to care for himself or herself.
If you are married but living apart from your spouse, you can claim child or adult care expenses for someone who lives with you for at least half the year. To qualify, you must pay more than half of your home maintenance costs.
Divorced or separated parents sometimes agree to allow the non-custodial parent to claim their child as a dependent on their tax return. If you don’t claim the child as a dependent, and he or she lived with you for more nights during the year than with the noncustodial parent, and you paid for the child’s care, you can claim the credit.
Adult dependents qualify if they lived with you for more than half the year and were not “physically or mentally capable of caring for themselves.”
The IRS defines someone who is physically or mentally unable to care for themselves as “individuals who are unable to dress, clean, or feed themselves due to physical or mental problems” and those who require constant care because they are at risk of injury.
Rules for qualifying day care providers
If you make child care payments to a dependent who cares for your children, you cannot claim those expenses. For example, you cannot claim payments you make to your dependent daughter to care for her brother.
However, the tax code allows you to claim the expenses if you don’t claim your daughter as a dependent and she is 19 or older at the end of the year.
Regardless of your spouse’s age, the IRS will not allow you to claim a tax credit for money it pays you to care for a qualifying child. You also cannot claim payments you make if the person providing care is a relative or dependent, and the child you are caring for is your own and is under 13 years of age.
Summer day camps are qualified providers if they specialize in one activity (computers or soccer, for example), but night camps do not qualify.