How the Child and Dependent Care Tax Credit Helps Families

Mar 10, 2022 | GTM Blog, Household Payroll & Taxes, Tax Season

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Child care can be costly but there are a few ways families can cut the expense of child care such as claiming the Child and Dependent Care Tax Credit when they file their personal tax returns. With an expanded credit for this filing season, it is a tax-savings opportunity not to miss.

As many families know, raising a child is expensive and child care – whether hiring a nanny or using a daycare center – can be costly. But there are a few ways working parents can reduce the costs of child care including claiming the Child and Dependent Care Tax Credit when they file their personal tax returns.

The IRS is reminding families and others this filing season that expenses paid for the care of eligible children and other dependents while working or looking for work – like wages paid to a nanny – may qualify for this tax credit.

There are many important tax credits available for families, and we don’t want anyone to overlook the Child and Dependent Care Credit. We encourage families and others who may qualify for this credit to carefully review the criteria to make sure they receive the maximum amount they’re entitled to. We also encourage the tax professional communities and others to share this important information.

IRS Commissioner Chuck Rettig

The Child and Dependent Care Tax Credit is calculated based on your income and a percentage of expenses that you incur for the care of qualifying persons to enable you to go to work, look for work, or attend school.

For tax year 2021 (returns that are due April 15, 2022), the American Rescue Plan Act of 2021 made the credit substantially more generous (up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons) and potentially refundable, so you might not have to owe taxes to claim the credit (so long as you meet the other requirements).

While more families will qualify this year than ever before, taxpayers with an adjusted gross income over $438,000 are not eligible for this credit even though they may have previously been able to claim this credit.

Depending on their income, families can get a credit worth 50 percent of their qualifying childcare expenses. For tax year 2021, the maximum eligible expense for this credit is $8,000 for one qualifying person and $16,000 for two or more.

Families with a household income between $185,001 – $400,000 can take a credit of 20 percent on qualifying expenses meaning the credit is worth $1,600 for one child and $3,200 for two or more children. The amount of the credit gradually decreases based on a family’s household income until it phases out at $438,000.

For the purposes of this credit, the IRS defines a qualifying person as:

A taxpayer’s dependent who is 12 or younger (no age limit if incapacitated) when the care is provided.
A taxpayer’s spouse who is physically or mentally unable to care for themselves and lived with the taxpayer for more than half the year.
Someone who is physically or mentally unable to take care of themselves and lived with the taxpayer for six months and is either the taxpayer’s dependent or would have been the taxpayer’s dependent except for one of the following: the qualifying person received gross income of $4,300 or more; the qualifying person filed a joint return; the taxpayer or spouse, if filing jointly, could be claimed as a dependent on someone else’s return

Families can use the Interactive Tax Assistant to help you determine if they are eligible to claim the Child and Dependent Care Credit for expenses paid for the care of an individual to allow you to work or look for work. You will need to know:

The date of birth for the child or dependent that received care.
If married, your filing status.

Also, see the Frequently Asked Questions on IRS.gov for more information and to determine if you can claim this credit.

GTM can help

Hiring a nanny means taking on payroll and tax responsibilities. This is where GTM comes in. We can take care of setting you up as an employer, taking care of payday, managing all of your tax filings, and more. It can be that easy! To learn more, call (800) 929-9213 for a complimentary, no-obligation consultation with a household employment expert. Or schedule time with us at your convenience.