Child and Dependent Care Credit for 2021

If you have a dependent child under age 13, or any other dependent or a spouse incapable of caring for themselves and you pay someone to provide household services or care for them while you work or seek work, you may be eligible to claim the Child and Dependent Care Credit (“Care Credit”).    

Eligible expenses for qualifying individuals include household services and expenses for the care of the qualifying individuals. The costs of summer camps qualify, but overnight camps do not. Qualifying expenditures include nursery school, preschool and similar programs, while expenses for elementary school (including kindergarten), summer school and tutoring costs do not. In most cases, before- and after-school care qualify.   

Effective for tax year 2021 only, the American Rescue Plan Act increased eligible expenses to $8,000 (up from $3,000) for one dependent and up to $16,000 (up from $6,000) for two or more dependents. The Care Credit is 50% of the eligible expenditures if adjusted gross income is less than $125,000. The Care Credit is reduced by one percentage point for every $2,000 (or fraction thereof) exceeding $125,000, but it can’t be reduced to less than 20% unless adjusted gross income exceeds $400,000. The 20% is then reduced by one percent for each $2,000 (or fraction thereof) that exceeds $400,000 until it is fully phased out.      

Previously, the Care Credit was not refundable, but for 2021 it is. Form 2441 is used to claim the Care Credit.

Through the dependent care assistance program, employer dependent care benefits are to be reported on Form W-2 (box 10). The amount of the benefits will be excludible up to a maximum exclusion of $10,500. The exclusion is reduced to $5,250 for those who are married filing separately. If the benefits received from the employer are more than the allowable exclusion amount, the excess is reported on Form 1040 (line 1) as income and should be labeled as “DCB.”