With the Child and Dependent Care Credit, Deducting Summer Camps and Daycare

With the Child and Dependent Care Credit, Deducting Summer Camps and Daycare ...

The Child and Dependent Care Credit is a tax benefit for many parents who are responsible for the cost of childcare. Although the credit is targeted towards working parents or guardians, taxpayers who were full-time students or who were unemployed for part of the year may also qualify.

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If you paid a daycare facility, babysitter, summer camp, or other care provider to care for a qualifying child under the age of 13, or a disabled dependent of any age, you may be eligible for a tax credit on your 2022 taxes of up to 35% of:

A taxpayer with one qualifying person, $3,000 in qualifying expenses, and an AGI of $60,000 would be eligible for a nonrefundable credit of approximately $600 (20% x $3,000) under the new law for tax year 2021 only, a taxpayer with the same circumstances may potentially get a refundable credit of roughly $1,500 (50% x $3,000).

The American Rescue Plan, signed into law on March 11, 2021, made significant changes to the amount and way that the child and dependent care tax credit may be claimed only for tax year 2021. The new law increases the credit, but also increases the amount of taxpayers who will benefit from the credits highest rate, and makes it fully refundable. This means that, unlike in previous years, you can still claim the credit even if you don't owe taxes.

Changes to the Child and Dependent Care Credit that will only be available for tax year 2021 (the taxes you pay in 2022) include:

  • The highest credit percentage increased from 35% to 50% of qualifying expenses
  • Qualifying child and dependent care expenses increased from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals
  • The adjusted gross income (AGI) level at which the credit percentage is reduced has been increased from $15,000 to $125,000 for 2021

As your adjusted gross income (AGI) reaches $125,000 in 2021, the credit phaser ceases.

  • $125,001 and $183,000 the credit percentage is phased out from 50% to 20%
  • $183,001 to $400,000 the credit percentage remains at 20%
  • $400,001 to $438,000 the credit percentage is phased out from 20% to 0%

For families with AGIs of $438,000 or more, the credit percentage has been phased out completely to zero.

The maximum amount that may be credited to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits are increased from $5,000 to $10,500 for tax year 2021.

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The child and dependent care credit is designed to assist working parents and guardians in coping with some of the expenses associated with raising a child or caring for a disabled dependent.

  • Varies, depending on the taxpayer's earned income,
  • Is based on the expenses paid to provide child or dependent care services so that parents can work, and
  • Reduces the amount of federal income taxes due, which can in turn increase your refund. This frees up more money for some of the other expenses involved in raising a child.

TurboTax Tip: For tax year 2022, the maximum amount that may be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is $5,000 ($2,500 if married filing separately).

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To be eligible for the child and dependent care credit, you must satisfy several requirements. You must also meet all of the following requirements:

  • You (and your spouse, if you are married filing jointly) must have earned income for the tax year.
  • You must be the custodial parent or main caretaker of the child or dependent.
  • The child or dependent care service must have been used so that you could work or look for employment.
  • Your filing status must be single, head of household, qualifying widow or widower with a qualifying child, or married filing jointly.
  • Your child or dependent must be under 13 but there is no age requirement if they are disabled and physically or mentally incapable of caring for themselves.
  • The childcare provider cannot be your spouse or dependent or the child's parent.

Daycare fees may be eligible for the child and dependent care credit, but the IRS takes into account more than just the cost of daycare for this credit. Qualifying expenses also include:

  • Childcare provided by a babysitter or licensed dependent care center.
  • The cost of a cook, housekeeper, maid, or cleaning person who provides care for the child or dependent.
  • Day camp or summer camp fees, even for camps centered around a sport or activity, qualify if the camp was selected to provide care while the parent or parents were at work. However, overnight camps do not qualify.
  • Costs related to before- and after-school care for children under 13.
  • Costs related to a nurse, home care provider, or other care providers for a disabled dependent.

Keep in mind that schooling, tutoring, or overnight camps are not qualifying expenses.

Because each family is unique, the IRS has a series of exceptions to the rules in the qualification process. These exceptions allow a greater number of families to take advantage of the credit.

  • For divorced or separated parents, the custodial parent (the parent with whom the child resides for the most nights out of the year) can claim the credit even if the other parent has the right to claim the child as a dependent due to the divorce or separation agreement.
  • You can take the credit for the care of a disabled adult even if you cannot claim her as a dependent because she has too much gross income or because you or your spouse can be claimed as a dependent by someone else.
  • If your spouse is a disabled adult, the IRS waives the requirement for him to have earned income.
  • If your spouse was a full-time student who attended college for at least five months out of the tax year, the IRS considers her to have earned income for each month that she was a full-time student.

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