The $8,000 in Aid for Children or Dependents

Most U.S. families with children are familiar with the federal Child Tax Credit, given that parents of more than 60 million kids received enhanced payments in 2021. However, many may not know there’s another tax benefit geared towards parents that can be far more generous, providing up to $8,000 in tax credits this year.

The Child and Dependent Care Credit was supercharged through the 2021 American Rescue Plan, with the augmented bill increasing the amount parents can claim on their tax returns for child care expenses, and making it refundable! The latter is important because if the tax credit exceeds what you owe the IRS, you’ll be able to claim the difference in your tax refund.

The Biden administration said this credit expansion was geared toward helping parents return to work. Under the expansion, parents can receive a tax credit worth as much as $8,000 — nearly four times the previous limit of $2,100.

The Child and Dependent Care Credit isn’t new — it’s been around since the 1970s and was designed to help working parents offset the costs of daycare, after-school programs, and summer camps. But the credit hadn’t kept up with the pace of child care costs, with the child advocacy group First Five Years Fund noting in 2018 it only covered about 10% of the typical annual cost of care for two children in the U.S. at the time.

The most parents can receive from the tax credit is $8,000, which applies to families with two or more children. The expanded tax break lets families claim a credit worth 50% of their child care expenses, which can be up to $16,000 for two or more kids. In other words, families with two kids who spent at least $16,000 on daycare in 2021 can get $8,000 back from the IRS through the expanded tax credit.

Parents and people with dependents who paid for the care of a qualifying individual in order to allow themselves to work or look for work during 2021 are eligible for the expanded tax credit. A qualifying individual can mean a few things, according to the IRS:

The last bullet listed is important because it extends the benefit to people who are caring for older or adult children with disabilities, as well as, say, taxpayers who claim elderly relatives as dependents and who pay for their care.

Because the Child and Dependent Care Credit is aimed at helping working people pay for child care, parents must have spent money on care for their children or dependents which would allow for the parent to work or look for work.

People who pay for the care of older dependents can claim expenses such as adult daycare.

The care can be provided inside or outside the home, ranging from nannies to child care centers. But the IRS requires parents to provide the name of the provider as well as their Social Security number or their EIN and check a box to indicate whether they are a household employee. Form 2441 is used to claim the credit and can be found here.

Qualifying expenses for this credit may include but are not limited to:

Like many of the provisions in the American Rescue Plan, the expanded Child and Dependent Care Credit is only valid for the 2021 tax year — the year for which people are now filing their tax returns.  This means for the 2022 tax year, the tax credit will return to its previous form. Due to this, when parents claim the tax credit on their returns next year, the benefit will be reduced to the previous maximum of $2,100.