Taxes
If Your Kid Goes To Day Care, You Might Be Eligible For A Tax Credit
Here’s how to figure out if you qualify.
When I talk to my working friends, most of them have the same frustration with one expense each month — day care costs. I work from home so I haven't had to navigate this issue too much, but from what I hear, day care is expensive. Many people employ the low-cost day care options or use government assistance, but with tax season here, lots of parents are wondering if day care is tax exempt.
According to the Center for American Progress, in 2021, families with infants would need to pay on average about 21% of the U.S. median income per year to cover child care costs. Per the same research, the true cost of child care is more than most families can realistically afford. It's no wonder so many parents try to find family members to watch their children or opt to stay at home themselves, but for many, day care is an absolute necessity.
But can it benefit you when it's time to do your taxes? Are day cares tax exempt?
Not exactly, but there is a federal child tax credit that can help you out with your child care expenses. “The Child and Dependent Care Credit offers you a 100% refundable credit as a percentage of the total you paid for expenses,” explains David Aylor, a practicing lawyer and the CEO of David Aylor Law Offices in South Carolina. “To clarify, that's not a deduction that can bring your taxes owed to zero, but a credit that will put money back in your pocket as a percentage of your annual child care expenses.”
In previous years this credit was non-refundable, meaning you could use it to lower your taxes owed — in turn, you’d only qualify if you actually owed money. But thanks to the American Rescue Plan Act of 2021, this has changed. “One of the biggest wins this year, other than the steep increase in benefits that better align with realistic child care costs, is that you no longer need to owe taxes to claim the credit as you have in the past,” Aylor says. “That means more cash back into the pockets of parents all over America, regardless of how much they owe at tax time, a practical benefit when so many parents are struggling most.”
The amount of child care expenses you can claim has also expanded this year from last. “For one child, your qualifying employment-related expenses have gone from $3,000 to $8,000,” Paul Miller, a New York City-based CPA and founder of tax accounting firm Miller & Company LLP, tells Romper. “For two children, it increased from $6,000 to $16,000.” The maximum credit has also increased from 35 to 50%, Miller says, “with a maximum credit of $4,000 for one child and $8,000 to two children. The credit is a percentage of qualified allowed expenses from 50% depending on your adjusted gross income (AGI). As your AGI increases, the credit and percentage of the tax credit decreases.” In previous years, the AGI for which the credit starts to reduce was set at just $15,000, but this number has been bumped all the way up to $125,000 this year. This means the credit percentages won’t start to decrease until your AGI hits $125,000 — a huge win for many households.
Not everyone is eligible for the credit, however. Only taxpayers making an AGI below $438,000 can claim it, according to Aylor. If you fall below this cap and meet the following four requirements, you're eligible for the child and dependent care credit.
1Your spouse or co-parent cannot be the care provider
If you pay a family member, an in-home day care, a tax-exempt organization like a church, or a traditional child care facility, you can receive the credit. But you are not eligible if the person you're paying to provide you with child care is your spouse or a parent of the child (such as an ex-partner). You also can’t hire your teenage child to care for your toddler and expect to claim the credit. “If you paid a babysitter, you must pay them to watch your child during work, they must not qualify to be your dependent, and the babysitter [cannot be] your child (if younger than 19),” Agustin Arbulu from W Tax Group tells Romper. If they’re 19 or older and no longer your dependent, you’re still eligible.
2If you’re married, you must file jointly
You can only claim the tax credit if you file your taxes as single, married and filing jointly, head of household, or qualifying widow(er) with a dependent child, per the IRS. If you and your spouse separated during the year but haven't finalized the divorce, you must file your taxes together if you hope to earn this credit. However, there are exceptions to this rule: “If a couple is legally separated or living apart from another spouse, one of them may be able to file a separate return and still claim the credit,” says Arbulu. The IRS points to the “What’s Your Filing Status?” section of Publication 503, Child and Dependent Care Expenses to learn how your specific situation may apply.
3A child must be 13 or younger when care was provided
According to the IRS, the child must have been 13 or younger during the time of care in order for you to receive the credit. The IRS also notes that to be considered “your qualifying child,” they have to live with you for more than half the year. So, under the special rules for children of divorced or separated parents, the non-custodial parent (the parent the child spent fewer nights with during the taxable year) cannot claim the child as a qualifying person.
4You must have earned income
Non-work income, such as profits from an interest and dividends or unemployment compensation, does not count as earned income. The IRS makes it clear that you (and your spouse if you are married) must have earned income from wages, salaries, tips, or other taxable employee compensation.
“One thing to note is if a spouse is in school (or not able to care for themself) or a student, they can be considered as having earned income,” Arbulu tells Romper. According to the IRS, the person who is a full-time student or incapable of self-care will be treated as having earned income to the amount of $250 per month for one person and $500 per month for two.
If you meet all these qualifications, it’s definitely worth claiming the credit on your taxes this year. Reach out to an expert if you need help sorting through the specifics (it’s a lot), to ensure you’re making the most of the new changes that can benefit your family’s finances.
Experts:
Dr. Agustin Arbulu, LLM, JD, President and COO of W Tax Group
David Aylor, lawyer and founder and CEO of David Aylor Law Offices
Paul Miller, New York City-based CPA and founder of tax accounting firm Miller & Company LLP
This article was originally published on
