The child and dependent care tax credit helps to offset the cost of child or dependent care for families that pay for care while they work—whether that’s child care, summer camp, babysitting, adult day care, or another form of care for qualifying dependents. Over the years, the child and dependent care tax credit has undergone significant changes, first with President Donald Trump’s Tax Cuts and Jobs Act of 2017 and then with President Joe Biden’s American Rescue Plan for 2021.
This guide outlines what the credit is, how it’s calculated, who qualifies, and how much you may be able to claim in 2022.
What is the child and dependent care credit?
The child and dependent care credit is a tax break that may help U.S. families pay for the care of eligible children and other dependents so that they can work or search for employment. The credit can apply to costs for adult caregivers, babysitting, daycare, or even summer camp. However, it’s important to note that the care expense is only eligible if you are working during the time you’re paying for the service. That means you can’t claim the credit for babysitting expenses while you’re on vacation. The credit also doesn’t apply if you’re a full-time stay-at-home parent.
Remember, dependent tax credits aren’t just for children
Your child care expenses must be related to caring for children who are younger than 13 years old. However, you can also claim expenses incurred for caring for individuals above the age of 13 (dependents or a spouse) if they’re considered physically or mentally incapable of providing their own care and live with you for more than half the year. You can even claim expenses incurred for elderly parents you care for in your home.
U.S. citizens and taxpayers that the IRS considers residents and non-residents can claim the credit. However, it is only refundable if you lived in the U.S. for more than half of the year.
To claim the child and dependent care credit, U.S. families must have:
- A qualifying child (under the age of 13)
- Or a dependent/spouse (who is mentally or physically unable to care for him or herself and lives with you for more than half the year)
- Child or dependent care expenses that you incurred in order to either work or look for a job
- A jointly filed tax return if you’re married (unless you’re considered legally separated)
- Earned income during the tax year of up to $438,000 annually
How is the credit calculated?
The child and dependent care credit is calculated based on your adjusted gross income (AGI), how many dependents you have, and the percentage of expenses that you incur for the care of qualifying individuals.
In 2021, the American Rescue Plan made the child and dependent care credit substantially more generous. The plan increased the maximum credit percentages, maximum claim thresholds, and AGI thresholds. The child and dependent tax credit was also fully refundable in 2021, which meant that you could claim the credit as a tax refund even if you had no tax liability.
- Taxpayers with one child could submit up to $8,000 of qualifying expenses
- Taxpayers with two or more children could submit up to $16,000 of qualifying expenses
- Credit of 50% of what you paid = a maximum of $4,000 for one child and $8,000 for two or more children (provided your household earned under $125,000)
Dependent credit after 2021
For tax year 2022, the dependent care credit will revert to what it was in 2020. In 2022, U.S. households must have a combined income of less than $15,000 to get the maximum $1,050 for one child or $2,100 for two or more children. At an IRS reimbursement rate of 35%, taxpayers with one child can claim a maximum of $3,000 in expenses, while those with two children can claim up to $6,000.
The more money you make, the smaller the reimbursement. Families with annual income between $45,000 and $438,000 can claim 20% of their care expenses (up to $600 in credits for one child or $1,200 if you have two or more children).
Read more about the 2022 tax changes you need to know.
Dependent tax credits for 2022
|No. of children||Max expenses||Max credit||Income threshold for max credit||Income threshold for partial credit|
Tips for claiming the credit on your tax return
- You’ll need to complete Form 2441 and include it with your federal income tax return to claim the dependent.
- In the case of an adult dependent or spouse, be prepared to submit information describing the disability.
- Have information about qualifying caregivers at hand, including their social security or ITIN numbers, address, employee status, and the total amount that you paid them in that tax year.
- Keep careful track of how much you spent on work-related child care in any given tax year.
If you’re a parent or caretaker of dependents and under the income thresholds, you can claim the child and/or other dependent tax credits when you file your 2022 tax return. If you have any questions, please don’t hesitate to contact our Jacksonville, Florida-based CPA firm.