Good to Know
The Child and Dependent Care Credit (a potentially refundable tax credit for 2021) is to incent employment. Employed taxpayers receive a tax credit if they have dependents who need child care. The credit is available to those taxpayers currently employed and those seeking employment. Restrictions, conditions, and coordination rules apply.
The credit amount is based upon the credit rate and level of qualifying expenses. The credit rate is between 20% and 50% (2021) based upon the taxpayer’s adjusted gross income and number of children.
Qualifying expenses may not exceed the lesser of actual care expenses, earned income (if married, the earned income of the lower-earning spouse), or a fixed statutory amount. The fixed statutory amount is $8,000 (2021) for one qualifying child and $16,000 (2021) for two or more qualifying children.
The credit is available only to taxpayers who:
- Have earned income or are seeking employment,
- Have adjusted gross income below or within a phaseout range,
- Do not pay dependents for child care,
- Do not file as married filing separately, and
- Have at least one qualifying child who can be claimed as a dependent and is under age 13, or a dependent of any age who is physically or mentally incapable of self-care.
Child and dependent care expenses reimbursed under a Dependent Care Assistance Plan or Dependent Care Flexible Spending Arrangement are not eligible for the Child and Dependent Care Credit.
Romeo and Juliet file their income tax return as married filing jointly. In 2021, Juliet earns $65,000 annually, and Romeo earns $25,000 annually. They have three children aged 6, 8, and 10. They pay annual qualifying child care expenses of $3,500 per child ($10,500 total). They qualify for the maximum child care credit rate of 50% (2021) based on their adjusted gross income. Neither spouse participates in a dependent care assistance plan or dependent care flexible spending arrangement.
They will receive a child credit of $6,750 calculated as 50% of the lower of:
- Total child care expenses of $13,500,
- A fixed statutory amount of $16,000, or
- Romeo’s earned income of $25,000.