Child care can be a big expense for families, and this significant improvement to the child and dependent credit is a much-needed help for these families. You may be eligible for the child and dependent care credit if you pay someone to look after your children or another dependent while you work or look for work. This credit “returns” a percentage of the money you spend on child care and can save you hundreds or even thousands of dollars on your taxes. This article takes you through the ins and outs of Child and Dependent Care tax credit, and we hope it will be of good use to you.
What are the benefits?
The Child and Dependent Care Credit is a tax credit created to aid working parents in helping offset child care costs.
The credit comes with two key advantages:
- Rather than a tax deduction, this is a tax credit. A tax deduction reduces the amount of money you have to pay on taxes. Depending on your tax bracket, a $1,000 deduction may only cut your tax bill by $150 or $200. A tax credit, on the other hand, decreases your taxes straight, dollar for dollar. Your tax bill will be reduced by $1,000 if you receive a $1,000 tax credit.
- The credit is available to those families making under $400,000 a year. The credit does start to phase out once your income is over $125,00 by a certain percentage.
Who is eligible for this?
You must have paid someone, such as a nanny or daycare provider, to care for one or more of the following people to qualify for the child and dependent care credit:
- A child under the age of 12 who you declare as a dependent on your tax return at the end of the year.
- If your spouse cannot care for themselves and has lived in your house for at least half of the year, you may file a claim.
- Any other individual identified as a dependent on your tax return cannot care for themselves and has resided in your house for at least half of the year.
- If filing jointly, a tax credit On both husband and wife must work, subject to certain exceptions.
So how much credit can you obtain?
Your credit amount is determined by the amount you spend on child and dependent care, as well as your income. So how does it really work? You may want to go through the points that have been mentioned below:
- Add up the entire amount of your credit-eligible childcare expenses
- You must deduct money received from your permitted costs if your employer gives you money to pay for child care charges or withhold money from your salary on a pre-tax basis.
- Make sure your income is under $400,000.
For the 2021 tax year (tax payable in 2022):
For one qualifying person, the number of eligible credit increases from $3,000 to $8,000, and for two or more qualifying individuals, the credit increases from $6,000 to $16,000.
The percentage of qualified expenses eligible for the credit rises from 35% to 50%.
Also, for this year, the credit is fully refundable.
The starting point for the credit reduction has been raised from $15,000 to $125,000 of adjusted gross income (AGI).
Also, a tax credit on the maximum amount donated to a dependent care flexible spending account is worth mentioning. The amount of tax-free employer-provided dependent care benefits has been increased from $5,000 to $10,500 for 2021.
So this is all about Child and Dependent care tax credit. However, you will always be needing a knowledgeable accountant who can make the entire process easy for you. So whatever you do, always take the right advice from the expert so that you are not losing out on the tax credits you deserve!