The US tax code supports working parents through three tax credits- the Child Tax Credit, the Earned Income Credit, and the lesser-known Child and Dependent Care Credit. This last item has been the least beneficial of the three for many years, because it wasn’t payable unless you owed taxes, which most low-income families don’t. But for 2021, things have changed.
For this year only the childcare credit has been supercharged. In past years the credit was limited to $3,000 maximum childcare expenses per child, which is nowhere near what most parents pay for childcare per year. The new credit allows up to $8,000 in childcare expenses for one dependent under age 13. ($16,000 for 2 or more) That, plus raising the maximum percentage from 35% to 50% means that working parents could qualify for up to $4,000 or $8,000 on this credit in addition to the other available credits!
Eligible childcare can be provided by individuals or licensed daycares, and includes after-school care, some summer camps, preschool, and full daycare for infants and toddlers. The only catch is that the care provider must provide their tax id to their customers so that they can claim this on their tax return, which means the provider must claim it as income on their own tax return. Some smaller providers may balk at doing this, even though it’s always been a requirement, but with thousands of dollars at stake it’s more important than ever to get this information.
The childcare credit does start to phase out if parent’s income goes higher than $125,000 and goes away completely at $438,000. The supercharged childcare credit is only good for 2021, and then the rules revert back in 2022 unless congress acts.