Child and Dependent Care Tax Credit

By Mark Castro, CPA
October 6, 2021

For taxpayers who had qualifying expenses for their children or other qualifying person, the American Rescue Plan Act of 2021 (ARPA) increases the likelihood that these taxpayers will be able to qualify for the Child and Dependent Care Tax Credit (CDCTC) and receive a larger credit for 2021.

What is the Child and Dependent Care Tax Credit

If an individual paid someone to care for their child or other qualifying person so that they (and their spouse if filing jointly) could work or look for work in 2021, they may qualify for the child and dependent care expenses credit.

The individual (and their spouse if filing jointly) must have earned income in 2021 in order to qualify for the credit.

Taxpayers who file as married filing separately do not qualify for this credit.

Who is a Qualifying Individual

A qualifying person for the child and dependent credit is:

• A child under the age of 13 whom the taxpayer can claim as a dependent.
• The taxpayer’s disabled spouse who was not physically or mentally able to care for themselves
• Any disabled person who was not physically or mentally able to care for themselves whom the taxpayer can or could claim as dependent.

The disabled person does not qualify if:

• They had gross income of $4,300 or more
• They filed a joint federal return
• The taxpayer (or their spouse if filing jointly) could be claimed as dependent on another taxpayer’s 2021 return.

How to Claim

The taxpayer claims the child and dependent care credit for 2021 by completing and filing Form 2441 (Child and Dependent and Dependent Care Expenses).

Eligible expenses for the Child and Dependent Care Credit

The expenses that qualify to be used in the calculation of the Child and Dependent Care credit are amounts paid the care of the qualifying person and for household services while the taxpayer worked or looked for work during 2021.

The costs for the qualifying person include the cost of services for their well-being and protection. It includes the cost of care provided outside the taxpayer’s home for their dependent under age 13 or any other qualifying person who regularly spends at least 8 hours a day in your home. If the care was provided by dependent care center, the center must meet all applicable state and local regulations.

A dependent care center is defined as a place the provides care for more than six persons (other than those who live there) and receives a fee or payment for providing services for any of those persons.

Household services are defined as services needed to care for the qualifying person as well as run the home. They include the services of a cook, maid, babysitter, housekeeper, or cleaning person if the services were partly for the care of the qualifying person.

2021 CDCTC Update

For 2021, the Child and Dependent Care Credit has the following changes:

• It is fully refundable
• The amount of qualifying expenses has increased to:
• $8,000 for one qualifying child (maximum credit $4,000)
• $16,000 for two or more qualifying children (maximum credit $8,000)
• The credit rate and income limits were increased as follows:
• 50% of expenses for taxpayers with AGI under $125,000
• Credit rate gradually declines to 20% when the AGI reaches $183,000
• 20% rate applies for taxpayers with AGI between $183,001 and $400,000

This credit will be nonrefundable for any taxpayer whose main home was outside the U.S. for more than half the year.

For more information on what has changed for 2021 see Child and Dependent Care Tax Credit FAQs on the IRS website. This site answers questions related to this credit such as:

• What the residency requirements are
• What if a taxpayer lives in a US territory?
• Details on what expenses qualify for the credit

FAQ

Can you claim both the Child Tax Credit and Dependent Care Credit?

Yes, you may claim both of these credits on your 2021 federal return as long as you meet the qualifications for each credit.

What happens if someone claims your dependent?

The taxpayer must claim the qualifying person as a dependent on their 2021 return (with the exception noted below for children of divorced or separated parents) in order for expenses related to the care of that person can be used to calculate the Child and Dependent Care Credit.

For children of divorced or separated parents or parents living apart, a taxpayer may treat a child as a qualifying child (even if they cannot claim them as a dependent) if:

• The child is under age 13 or was not physically or mentally able to care for themselves;
• The child received over half of their support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separate maintenance agreement, or lived apart during the last 6 months of 2021;
• The child was in the custody of one or both parents for more than half the year; and
• The taxpayer is the child’s custodial parent. The custodial parent is the parent with whom the child lived for the greater number of nights in 2021. If the child was with each parent for equal number of nights, the custodial parent is the parent with the higher adjusted gross income.

Additional Child and Dependent Care Tax Credit Resources

For more information on the qualifications for the Child and Dependent Care Credit see the following on the IRS website:

• 2020 Form 2441 instructions
• IRS Publication 503 (Child and Dependent Care Expenses)