Parents of more than 60 million kids received enhanced payments in 2021 thanks to the Child Tax Credit, but there's another tax credit that some parents may not know about and it can give you up to $8,000.
The Child and Dependent Care Credit operates through the American Rescue Plan Act of 2021, and can provide up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons.
Additionally, the credit is potentially refundable so parents may not have to owe taxes to claim the credit.
The Child and Dependent Care Credit has been around since the 1970s and was created to help parents offset the costs of daycare, summer camps, etc. It wasn't until the American Rescue Plan Act that the credit expanded to help more parents and families.
"They are recognizing the increasing cost of child care in our country," Robbin Caruso, co-lead of Prager Metis' National Tax Controversy Practice, said. "It's a huge opportunity for taxpayers, and it shouldn't be missed out on."
Since the credit is fully refundable, it could increase the tax refund that parents end up receiving this year.
So who's eligible for this credit? Parents and those who paid for the care of a qualifying individual so they could work or look for work last year are eligible for the expanded credit.
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According to the IRS, a qualifying individual is a child under the age of 13 that is claimed as a dependent, or a spouse or dependent of any age that can no longer care for themselves and lives with you for at least 6 months of the year. This opens the door for those who take care of elderly relatives or adult children with disabilities.
"If you have a child with disability, there's no age limit," Lisa Greene-Lewis, a CPA and tax expert at TurboTax, said.
The American Rescue Plan's expansion for the Child and Dependent Care Credit allows families and parents to claim a credit worth 50% of their child care expenses, up to $16,000 for two or more kids. So a family with two children that spent $16,000 in 2021 can get back $8,000 because of the credit.
Before the American Rescue Plan's expansion, families were only allowed to claim 35% of a maximum of $6,000 in care expenses for two children.
Expenses such as day camps and before- and after-school programs are eligible to count towards the credit, as long as the parents were working or looking for work as the reason to pay for care.
"It can count for summer camp, sports camps — as long as it's enabling you to work or look to work," Greene-Lewis noted.
Sending your child to private school is not considered an eligible expense under the credit because K-12 tuition is considered an educational expense, not a child care expense.
Additionally, the credit does not apply if a dependent, relative, or spouse is being paid for care. For example, you can't pay your teenage child to care for a younger sibling and then try to claim the credit.
There are some exceptions to who qualifies, as a parent who is a full-time student is considered to be working. However, if a parent looked for work but was unsuccessful and had no income of any kind for 2021, they would not be eligible to claim the credit.
The expanded Child and Dependent Care Credit under the American Rescue Plan is only valid for the 2021 tax year, and will return to its previous forms in 2022.
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