The dependent care tax credit is a benefit for people who pay for the care of a child or other qualifying person, such as an elderly parent or spouse. Depending on income, it is worth 20% to 35% of qualified care expenses paid in the year. Eligible expenses include daycare, preschool, and similar costs, day camps, and before- and after-school programs. It also includes transportation costs for the care provider and fees charged by a qualified person, such as application and registration fees. The credit is claimed by attaching two forms to the standard Form 1040. Form 2441, Child and Dependent Care Expenses has a worksheet that helps you figure out the exact credit amount you can claim. You must also file Schedule 3, which lists all qualifying expenses.
Some employers offer flexible spending accounts (FSA) that allow employees to set aside money on a pre-tax basis for qualified dependent care expenses. These amounts are withdrawn from the employee’s paycheck and then reimbursed when they file their taxes. Keeping track of these expenses throughout the year, whether through an Excel spreadsheet, receipts, or even bank account statements, can help families get the most out of this valuable tax break. The credit has been significantly expanded for 2021, so more households will likely qualify than ever.
Who is Eligible for Dependent Care Tax Credit?
Unlike some tax credits and deductions that apply to specific situations, the child and dependent care credit (CDCTC) generally benefits anyone who qualifies. For example, a family with two children can claim up to $2,100 (35% of $6,000 in expenses) for the year, assuming their income is under $15,000.
The CDCC is worth between 20 and 35% of qualifying expenses, depending on your adjusted gross income (AGI). To qualify for this credit, you must have paid expenses for the care of a qualified child or dependent or a qualified incapacitated spouse. Expenses that are eligible to be claimed include daycare, babysitter fees, home health aides, transportation costs for your child or dependent to and from the care provider’s home, and meals and snacks provided by the caregiver.
The person for whom you’re claiming the credit must have lived with you for more than half of the year and can be claimed as your dependent on your return. Also, the expenses you’re claiming must be for care needed to work or look for work. For more details, read Publication 503, Child and Dependent Care Expenses.