IRS Releases FAQs on Child and Dependent Care CreditsJune 22, 2021
Who is a qualifying person? Is there a limit on the amount of expenses you factor in to claim the credit? We shed light on these FAQs and more here.
Have you read our blog, American Rescue Plan Increases Tax Credits for Child and Dependent Care? You’ll want to read up on new frequently asked questions released by the IRS about these credits. Here’s a look at those FAQs.
10 FAQs- child and dependent care credits
- Am I eligible to claim the credit?
If you or your spouse pay someone to care for one or more qualifying persons in order for you to work (or seek work) and your income level falls within the income limits set for the credit, you are eligible.
- Who is a qualifying person?
-A child under age 13.
-A spouse who is physically or mentally incapable of self-care and lived with you for more than half of the year.
-Someone who lived with you for more than half the year who is physically or mentally incapable of self-care and is either: (a) your dependent; or (b) could have been your dependent but he/she is over the gross income limit or files a joint return.
- What percentage of my work-related expenses are allowed as a credit?
For 2021, the maximum percentage allowed as a credit is 50 percent.
- Can this 50% amount of work-related expenses be reduced?
Yes, your Adjusted Gross Income (AGI) amount determines the percentage you are allowed. The 50% begins to phase out if your AGI exceeds $125,000 and phases out entirely if your AGI is more than $438,000.
- Is there a limit on the amount of work-related expenses I can take into account in calculating the credit?
Yes, maximum is $8,000 for one qualifying person, $16,000 for two or more persons. Hence, the max credit for one person is $4,000 (50% of $8,000) and $8,000 for two persons (50% of $16,000).
- Can I take the full credit even if my credit exceeds the amount of taxes I owe?
Yes, if your credit exceeds the amount of federal income tax that you owe you are still able to claim the full credit amount. The amount of the credit that exceeds what you owe can be refunded to you.
- Are there special residency requirements for the refundable portion of the credit?
Yes, as long as your main home is in one of the 50 states or Washington D.C. for more than half of the tax year, you are eligible for the refund. This includes houses, apartments, mobile homes, shelters or temporary lodging.
- How do I claim the credit for 2021?
You need to complete Form 2441, Child and Dependent Care Expenses to claim the credit, and include it when you file your 1040. You need a valid taxpayer identification number for each qualifying person to complete the form 2441.
- What information do I need from my care provider to claim the credit?
You must provide all persons and organizations that provide care for your child, dependent, or spouse—name, address and TIN. To request this info, use https://www.irs.gov/forms-pubs... . Your credit may be disallowed if the info you provide is incomplete or incorrect.
- Can you still claim the credit if your spouse was out of work during the year?
It depends. You (and your spouse in the case of a joint return) must have earned income to claim this credit—this includes wages, salaries, tips, other taxable employee compensation and net earnings from self-employment income. Unemployment compensation is not included in earned income.