What is the Child Care Tax Credit? 2021, 2022

The child and dependent care tax credit (CDCTC) gives a refundable credit of up to 50% of child care expenditures for a child under the age of 13 or any dependent who is physically or mentally incapable of caring for themselves.

Child care credit expenditures are restricted to $8,000 per dependent (up to $16,000 if there are two or more children). The credit will be nonrefundable after 2021, and the maximum credit rate will reset to 35%. Child care costs that are eligible will be restricted to $3,000 per dependent (up to $6,000 for two or more kids).

How Much is the Care Credit Rate?

Credit rates are higher for households with a lower adjusted gross income. The 50 percent credit rate will be phased off in two stages beginning in 2021. Families with an adjusted gross income of less than $125,000 are eligible for the full 50% child care credit deduction. The CDCTC rate subsequently decreases by one percentage point for every additional $2,000 of adjusted gross income (or portion thereof), until it hits 20% (at $183,000 of income).

The credit rate is decreased from 20% to 0% by one percentage point for each additional $2,000 of adjusted gross income (or portion thereof) exceeding $400,000 of adjusted gross income. At $438,000 of adjusted gross income, the credit is entirely phased out. After 2021, only the first phase of the phase-out is in effect, and the credit rate is not dropped below 20%. (figure1).

Is the CDCTC Refundable?

The CDCTC was nonrefundable prior to the ARP. That is, it could only be used to pay back taxes. If a household qualifies for a CDCTC that exceeds taxes owing, they might get the difference as a tax refund under the ARP. The CDCTC will return to its pre-ARP norms in 2022.

A single parent must be employed or enrolled in school to be eligible for the CDCTC. Both people in a married relationship must be employed or enrolled in education. In general, acceptable costs are limited to the lower-earning spouse’s wages.

Individuals who are students or handicapped might have their earning income presumed to be $667 per month ($1,334 if there is more than one qualified kid) under special criteria. Calculate your child care credit 

According to the Urban-Brookings Tax Policy Center, the CDCTC will assist 14% of households with children in 2021. Under the pre-ARP standards, the credit benefitted 13% of households. Some families with children will not qualify for the CDCTC because they do not have child care costs or, in the case of married couples, just one spouse works or attends school.

Taxes will be lowered by an average of $2,174 for families with children who benefit from the CDCTC. Under pre-APR standards, the average credit granted to families that applied was $593.

Under the 2021 guidelines, average benefits for the lowest and highest income quintiles are lower than those for the middle three income quintiles. Prior to ARP, average benefits were lower for families in the lowest income quintile than for all other income quintiles.

Families in the lowest income quintile are more likely to have lower child care expenditures than those in higher income quintiles, while families in the highest income quintile may face a credit phase-out in 2021.