How to Claim the 2021 Child and Dependent Care Credit

The Child and Dependent Care Credit is a tax benefit that helps working families offset the costs of care for children and other dependents. While the rules for this credit were temporarily expanded for the 2021 tax year, they have since reverted to their prior structure. The credit is nonrefundable, which means it can reduce your tax liability to zero, but you cannot get any of it back as a refund beyond what you owe.

Determining Your Eligibility for the Credit

Qualifying Person Test

The primary definition of a qualifying person is a child who lived with you for more than half the year and was under the age of 13 when the care was provided. This test is based on the child’s age at the time the service was rendered, not their age at the end of the tax year.

Any other dependent who was physically or mentally incapable of self-care and lived with you for more than half of the year also meets the definition of a qualifying person, regardless of their age. For a person to be considered incapable of self-care, they must have a condition that prevents them from handling their own hygiene, nutritional needs, or required medical care without substantial assistance from another person.

Taxpayer Eligibility Tests

If you are married, you must file a joint tax return to claim the credit. A requirement is the Earned Income Test. You, and your spouse if filing jointly, must have earned income during the year. Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment.

A special rule applies if one spouse did not have earned income but was either a full-time student for at least five months of the year or was physically or mentally incapable of self-care. In these specific situations, that spouse is treated as having a certain amount of monthly earned income for the purpose of calculating the credit.

Work-Related Purpose Test

You paid for the care so that you, and your spouse if filing jointly, could work or actively look for work. The time spent actively seeking employment counts, even if you do not ultimately find a job.

If you were employed part-time, you can only count expenses for the care provided during the hours you were working. The connection between the expense and the need to work is direct; costs for babysitting while you run personal errands or attend social functions, for example, do not qualify under this test.

Identifying Qualifying Care Expenses

The costs you can include are for the well-being and protection of a qualifying person while you work or look for work. Common examples of qualifying expenses include payments made to daycare centers, preschools (for programs below kindergarten), nannies, and before- or after-school care programs. The cost of a day camp during the summer also qualifies.

You cannot include the cost of tuition for a child in kindergarten or a higher grade. The cost of overnight camps does not qualify for the credit. Other non-qualifying expenses include the cost of transportation to and from the care provider, late payment fees, or activity fees for specialized lessons like sports or music.

An important factor is the interaction with employer-provided dependent care benefits. Employers can provide up to $5,000 in tax-free dependent care assistance through programs like a Dependent Care Flexible Spending Account (FSA). You must reduce your total qualifying expenses by the amount of any tax-free benefits you received from your employer. For instance, if you incurred $7,000 in daycare costs and received $5,000 from your employer’s dependent care plan, you could only use the remaining $2,000 of expenses to calculate the credit.

Calculating the Credit Amount

The first step in calculating the credit is determining your work-related expense limit. The limit is $3,000 for one qualifying person and $6,000 for two or more qualifying persons. Your allowable expenses are capped at these amounts, your total earned income, or your spouse’s earned income, whichever is lowest.

Next, you apply a percentage to your allowable expenses to determine the credit amount. The credit percentage is determined by your Adjusted Gross Income (AGI) and ranges from 20% to 35%. Taxpayers with an AGI of $15,000 or less can use the maximum 35% rate. The percentage decreases as income rises, down to 20% for taxpayers with an AGI of more than $43,000.

How to Claim the Credit on Your Tax Return

To claim the Child and Dependent Care Credit, you must complete and attach Form 2441, Child and Dependent Care Expenses, to your federal income tax return. This form is where you report the information to calculate the credit.

For each care provider, you must have their name, full address, and Taxpayer Identification Number (TIN). The TIN is the provider’s Social Security Number (SSN) if they are an individual or an Employer Identification Number (EIN) if they are a business. You must also provide the name and SSN for each qualifying person who received care.

You must have the correct TIN for your care provider; the IRS can disallow your credit if this information is missing or incorrect. If a provider refuses to give you their TIN, you should document your attempt to obtain it to show due diligence.