There is a new tax credit for 2021 worth up to $8000!

Do you pay someone to look after your children who are younger than 13, or your disabled spouse or relative, when you are at work or looking for work? There is a new tax credit for 2021!  It is worth up to $8,000 and is different than the new Child Tax Credit. Changes to the 2021 tax rules mean you could get some of your child or dependent care expenses from this year refunded to you next year. So, you should make sure you are keeping good records of who you are paying and your expenses this year!

What else do I need to know?

• The expenses have to be paid to care for someone while you are working or looking for work. You can only get expenses back that were paid for the care of children who were under 13 in 2020, or that were paid for the care of your spouse or for any other dependent who lived with you for more than ½ the year and was unable to care for themselves.

• You may be able to get a maximum of $4,000 back if you have only one dependent and a maximum of $8,000 if you have more than one dependent. 

• You can only get back 50% of the expenses you paid, and you can’t get back more money than you earned, or than your spouse earned if your spouse earned less than you (there is an exception if your spouse is unable to care for themself).  .   

• You can claim expenses for child or dependent care payments made to relatives, but payments to your spouse, to a parent of the child, to children under 19, or to your other dependents don’t count. 

• You can’t claim the expenses if you are filing Married Filing Separately (but you can if you are married and living apart from your spouse and qualify for Head of Household status). 

What information will I need to give my tax preparer or tax filing software?

Your tax preparer should know how to claim the expenses on your tax return next year, but you’ll want to be able to provide the information that the preparer will need. 

You should ask each caregiver to fill out and sign the IRS’s Form W-10, because to claim the expenses you have to provide the name and social security number of the person you are paying (or tax ID number of the company you are paying).  Or you can use a copy of that person’s SS card, or a letterhead or invoice with the caregiver’s or company’s name, address, and social security or tax ID number.  If the person won’t give you their social security number, you’ll need to be able to explain to the IRS what you did to try to get them to give it to you.   

You will also want to keep good records of the amount you paid to the caregivers.  Ask for receipts, and pay by check, money order (keep copies), or credit/debit card if possible so you have proof of the amount you paid.

If the care is provided outside your home by a person or company that provides day care for more than six people it needs to be in compliance with state and local regulations relating to day care centers.

The above is a simplified explanation of the Credit for Child & Dependent Care Expenses, and here is some more information about it.  Again, this is different than the new Child Tax Credit that the IRS is going to start paying out in July. Taxes can be complicated and confusing! If you have questions, contact us to see if we can help!