Few events have illustrated just how important child care is to both Americans’ wallets and the broader economy than the coronavirus pandemic: When families struggle to find or afford a caregiver, they’re often unable to work.
Households, however, have options to help defray some of those costs, one of which is the child and dependent care tax credit.
But while the tax break can provide essential financial help, it’s been massively revamped over the years, first with President Donald Trump’s Tax Cuts and Jobs Act of 2017 and again with President Joe Biden’s American Rescue Plan for 2021. That can make it harder for families to understand who qualifies — something that’s even more important for the 2022 tax-filing season, considering that even more families are eligible for a fully refundable credit that’s nearly quadrupled in size.
Here’s how the credit works, who qualifies and how much you could receive to help offset the cost of spending thousands of dollars each year on child care.
What is the child and dependent care credit?
The child and dependent care credit is a tax break to help cover families’ child care expenses, so they can continue working or searching for employment. That work could be for your own business, as well as both full- and part-time jobs.
If you paid for babysitting, day care or even a summer camp, you might be eligible to receive up to $8,000 in credits during this year’s tax season, depending on how many dependents you have and your household’s adjusted gross income (AGI). That’s up from $2,100 in all other tax years.
The “work-related” qualifier is key. Paying for babysitting or child care expenses to take a vacation, for example, wouldn’t be considered a qualifying expense.
“The point of the child and dependent care credit is a subsidy, so you can work,” says Eric Bronnenkant, CPA and CFP, who is head of tax at Betterment. “If you are a stay-at-home mom or dad, you typically don’t get any credit because of the fact that it is not helping you work, even if you are paying for dependent care.”
Be careful not to confuse the child care credit with the similarly named child tax credit, which was also expanded for 2021 and came with no restrictions on how to use the money.
How to qualify for the child and dependent care credit
To claim the child and dependent care credit, U.S. families must have:
- a qualifying child or dependent;
- child care expenses that you incurred to either work or look for a job;
- a jointly filed tax return …….