J.K. Lasser's 1001 Deductions and Tax Breaks 2022. Barbara Weltman

of a child in order to work. According to the World Population Review, the cost of child care in 2021 for an infant is $15,000 at a center. The tax law provides a limited tax credit for such costs, called the dependent care credit. The amount of the credit you may claim depends on your income. It may be as much as 50% of eligible expenses. Or, if your employer helps with child care costs, you may exclude the payments from your income.

       Benefit

If you hire someone to care for your children or other dependents to enable you to work or incur other dependent care expenses, you may be eligible for a fully refundable tax credit of up to $8,000. More specifically, this credit is a percentage of eligible dependent care expenses (explained later). The credit percentage ranges up to 50%. However, no credit may be claimed if income is $440,000 or more (explained later).

      If your employer pays for your dependent care expenses, you may be able to exclude this benefit from income up to $10,500 in 2021.

      The maximum amount of expenses taken into account for the credit in 2021 is $8,000 for one qualifying dependent and $16,000 for 2 or more qualifying dependents. This limit doesn't need to be divided equally among them.

      Example

       A single parent has two children. She spends $12,000 for daycare for one and $6,000 for after‐school daycare for the other. Because her total expenses do not exceed the limit of $18,000, she can take them all into account in figuring the dependent care credit for 2021.

      In 2021, the credit is fully refundable.

       Conditions for the Tax Credit

      There are a number of conditions for claiming the dependent care credit; you must satisfy all 8 of them to claim the credit:

      1 Incur the expenses to earn income.

      2 Pay expenses on behalf of a qualifying dependent.

      3 Pay over half the household expenses.

      4 File a joint return if you are married.

      5 Have adjusted gross income below a set amount.

      6 Have qualifying expenses in excess of employer reimbursements.

      7 Meet a residency requirement.

      8 Report information about the child care provider.

      INCUR THE EXPENSES TO EARN INCOME

      The purpose of the dependent care credit is to enable you to work. This generally means that if you are married, you both must work, either full time or part time.

      However, a spouse who is incapacitated or a full‐time student need not work; he or she is treated as having earned income of $250 per month if there is one qualifying dependent or $500 per month if there are 2 or more qualifying dependents.

      Example

       You are a single mother and a full‐time student with 1 child. You are treated as having earned income of $3,000 for the year ($250 × 12). You can use this income in figuring your credit, even though you didn't actually receive this income.

      PAY EXPENSES ON BEHALF OF A QUALIFYING DEPENDENT

This is for your child under the age of 13, your incapacitated dependent of any age, or your spouse who is incapacitated.

      If your child has his or her 13th birthday during the year, you can take into account expenses incurred up to this birthday.

      Only certain types of child care expenses can be taken into account in figuring the credit. Qualifying expenses can be incurred in your home or outside the home (using a day care center). You cannot include amounts paid to you, your child who is under age 19 at the end of the year, your spouse, or any other person you can claim as a dependent.

      EXAMPLES OF QUALIFYING EXPENSES

       Babysitter

       Day camp, including a specialty camp such as soccer or computers (but only the day cost of a sleep‐away camp)

       Day care center

       Housekeeper (the portion of compensation allocated to dependent care)

       Nursery school

       Private school (The costs for first grade and higher do not qualify unless the child is handicapped, provided the child spends at least 8 hours per day in your home.)

       Transportation, if supervised (so that it is part of care), such as to a day camp or after‐school program not on school premises, but not the cost of personally driving a dependent to and from a dependent care center

      You do not have to find the least expensive means of providing dependent care. For example, just because your child's grandparent lives in your home doesn't mean you must rely on the grandparent for child care; you can pay an unrelated person to babysit in your home or take your child to day care.

      The expenses you incur for dependent care must be greater than any amount you exclude as employer‐provided dependent care.

      PAY OVER HALF THE HOUSEHOLD EXPENSES

You (and your spouse) must pay more than half of the maintenance expenses of the household.

      FILE A JOINT RETURN IF MARRIED

      Generally, to claim the credit you must file a joint return if eligible to do so. However, you can claim the credit even though you are still married if you live apart from your spouse for over half the year, you pay over half the household expenses for the full year, and your spouse is not a member of your household for the last 6 months of the year. In this case, you qualify to file as unmarried (single).

      HAVE AGI BELOW SET LIMITS

      The credit percentage scales down as adjusted gross income (AGI) rises. The same AGI threshold and percentages apply to singles and joint filers. For 2021:

       The maximum credit of 50% of eligible expenses applies for AGI up to $125,000.

       The credit rate is reduced by one percentage point for each $2,000 of excess AGI, resulting in a 20% credit when AGI is $183,000. The 20% credit applies for those with AGI between $183,000 and $400,000.

      Example

       You are single with one qualifying child and have eligible expenses of $8,000. Your AGI in 2021 is $132,000. Your credit percentage is 46% (50% – 4 percentage points having $7,000 AGI over $125,000, which rounds up to $8,000 excess). Your credit is $3,680 (46% of $8,000).

       The 20% rate is further by one percentage point for each $2,000 of excess AGI over $400,000.

       No credit may be claimed once AGI is $440,000 or more.

      Example

       Same as the example above except you have AGI of $420,000. Your credit rate is reduced from 20% to 10% (20% – 10 percentage points for having $20,000 of AGI over $400,000). Your credit is $800 (10% of $8,000).

      MEET A RESIDENCY REQUIREMENT

To be eligible for the refundable credit for 2021, you must have your main home in one of the 50 states or the District of Columbia for more than half of the tax year. Your main home can be any location where you regularly