Understanding The Dependent Care Credit
If there’s someone in your household who currently depends on you to provide them with financial support, you may be eligible for the dependent care credit, which can be claimed when filing your annual tax return. This credit is designed to provide you with a portion of the funds that you spent on care during the year. If applied properly to your tax return, you may be able to lower the amount of tax you owe by hundreds or thousands of dollars.
What Is the Dependent Care Credit?
The dependent care credit is part of the Child and Dependent Care Tax Credit. This credit can be calculated by using your income as well as a percentage of the expenses you paid when caring for the qualified individual.
For the 2021 tax year, the dependent care credit grew substantially and is possibly refundable. As long as you currently meet all of the other requirements, you may be able to claim this credit even if you don’t owe any taxes for the year. Keep in mind that any taxpayer who has earned more than $438,000 for the year isn’t eligible for the dependent care credit.
How to Determine Eligibility
You may be eligible for the dependent care credit if you:
- Paid for a certain amount of care during 2021 for a qualifying dependent who was unable to care for themselves and lived directly with you or your family for at least half a year.
- Spent less money on dependent care in 2021 than your entire annual income. In the event that you’re filing a joint tax return with your spouse, the money you spent on care for the year needs to be less than the total income for the spouse who has the lowest earnings.
- Needed the dependent care in order to work or search for work. For a two-parent family, it’s essential that both spouses need dependent care to work or search for work unless one of the spouses was unable to care for themselves or was a full-time student.
All three of these requirements must be met for you to qualify. Keep in mind that any dependent care can qualify, which included family day care, vacation day camps, care provided by another relative, or care at a center. If you also qualify for the CTC and EITC, you can still seek the dependent care credit.
Identifying How Much You Can Claim
The amount of credit you receive largely depends on your annual income as well as the amount of money you spend on dependent care for the year. Any money you receive from an employer for child or dependent care expenses should be subtracted from the total amount of care expenses that qualify for this credit.
You should then compare the claimed expenses with your total earned income. The smallest of these amounts can be claimed as allowable expenses. The credit you qualify for is a percentage of these expenses. If your income is high, your percentage will be smaller, which means that your credit will be lower.
The American Rescue Plan has changed how much tax credits are able to be claimed for the 2021 tax year. As mentioned previously, these credits are fully refundable. For the 2021 tax year, this tax credit involves:
- The qualifying expenses for this credit have risen from $3,000 to $8,000 for one qualifying dependent and from $6,000 to $16,000 for at least two qualifying dependents
- The total percentage of expenses that this credit can be applied to has increased to 50% from 35%
- This credit can’t be obtained by anyone who has more than $438,000 in 2021 adjusted gross income
The max amount that you can contribute to a flexible spending account for dependent care has risen from $5,000 to $10,500.
The dependent care credit gives you the opportunity to reduce your tax bill or obtain a refund based on the amount of dependent care expenses you paid throughout the 2021 tax year. This credit is available to you even if you have applied for the Child Tax Credit and Earned Income Tax Credit.