You can now claim up to $16,000 in tax credit for child-care expenses. Learn how it works

You can now claim up to $16,000 in tax credit for child-care expenses. Learn how it works

A new year means a new tax season coming soon — and there are some big changes to the child and dependent care credit that could provide a major increase in your tax refund. The child and dependent care credit lets you write off expenses related to child or dependent care as a direct reduction in the amount of federal taxes you owe. The credit applies to expenses for day care, babysitters or care-related transportation for children or dependents.

Thanks to a one-time expansion of the credit in the American Rescue Plan Act, parents who paid for child care in 2021 are eligible to receive up to 50% of their child-care expenses back as a tax break or refund. The amount of tax credit you’ll be able to claim maxes out at $8,000 for one dependent and $16,000 for two or more. The catch? You’ll need all your receipts and other monetary proof to make sure you can claim the tax break when you file your income tax return.

We’ll explain how this child care tax credit works below. This story was recently updated.

What is the child and dependent care credit?

The child and dependent care credit is a tax break designed to let parents claim expenses from child care. For example, if you paid for a day care provider while you were working, that expense can be claimed as a credit when you file your taxes this year.

How is the child care credit different for 2021 taxes? In previous years, the maximum amount you could claim was $3,000 for one child or $6,000 for two or more. For 2021 expenses, you can claim up to $8,000 for one child or dependent and up to $16,000 for multiple children. The one-time expansion of the child care credit for 2021 also increases the maximum return rate for child care expenses from 35% to 50%.

What does that mean? In brief, for the 2021 tax year, you could get up to $4,000 back for one child and $8,000 back for care of two or more.

Before the American Rescue Plan, the child and dependent care credit was nonrefundable, meaning it could reduce your tax bill to zero but you would not receive a refund on anything extra. Now, the credit is fully refundable, meaning that you will receive money for it even if you don’t owe taxes.

What counts as an eligible expense for the child care credit?

The law defines expenses based on child care providers, but there’s some wiggle room that also accounts for expenses like transportation. Any organization or person providing care for your dependent counts as long as you’re paying them. (For example, a spouse or unpaid relative doesn’t count.)

The IRS has relatively relaxed rules about care providers, according to Elaine Maag, principal research associate at the Urban Institute. However, you’ll likely have better luck claiming child care credits for people and groups operating in an official capacity, such as nursery schools and day care centers, opposed to the $40 you paid a teenager to watch your child for an afternoon…Read more>>

Source:-cnet

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