The $8000 Child Tax Credit that Many Parents May Not Know About

The $8,000 Child Tax Credit that Many Parents May Not Know About

The federal Child Tax Credit is well-known to most American families with children, as more than 60 million families received increased payments in 2021. Even though the Child Tax Credit (CTC) may be more widely recognized, there’s another tax advantage specifically for parents that can provide 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 pandemic relief package raising how much parents may claim on their tax returns for child care expenditures and making it completely refundable. It is crucial to note that if the tax credit exceeds the amount of money you owe the IRS, you will get the difference in your tax return.

If you’ve ever had to pay for daycare or after-school activities for your children, you’re familiar with the Child and Dependent Care Credit (CDCC). As a result of the credit’s lag behind rising childcare prices, First Five Years Fund reported in 2018 that it only covered around 10% of the average yearly care cost for two children in the United States at the time.

Families were given several tax breaks under the American Rescue Plan. In addition, the Child and Dependent Care Credit were generously expanded by the Biden administration to assist parents in returning to the workforce. Thanks to the increase, parents may now claim a tax credit of up to $8,000, more than four times the previous cap of $2,100.

If you have a kid aged 6-17, the enhanced Child Tax Credit will pay you $3,600.

Robbin Caruso, co-leader of Prager Metis’ National Tax Controversy Practice, stated, “They are recognizing the escalating expense of child care in our society.” This is an excellent opportunity for taxpayers, and it shouldn’t be overlooked.”

According to Care.com, the average monthly cost of child care in 2020 will be $1,400 per month or $340 per week. A Bankrate.com poll found that one in five parents between the ages of 25 and 31 had to leave their employment to care for their children because of the high expense of child care.

That the credit may be claimed and reclaimed incomplete means that many parents may see an increase in their refund this year due to the tax credit, on the other hand, tax deductions reduce a person’s overall taxable income, whereas tax credits lessen a person’s tax burden dollar-for-dollar.

In other words, tax credits like the Child and Dependent Care Credit, which are refundable, are of more value to taxpayers than deductions.

Why don’t I ask for $8,000?

For families with two or more children, the maximum tax credit amount is $8,000, based on the number of children in the household.

As part of an enhanced tax break, families may claim a credit worth up to $16,000 for the cost of child care for two or more children. In other words, families with two children who spent at least $16,000 on daycare in 2021 are eligible for an additional $8,000 in tax credits from the IRS.

Before the American Rescue Plan, parents could only claim a maximum tax credit of $2,100, or 35% of a maximum child care spend of $6,000 for two children.

Single parents can claim expenses related to child care for one child for up to $8,000. Put another way, parents of a single child this year are eligible for a maximum tax credit of $4,000. Tax credits were formerly limited to $1,050 per family with one kid before the American Rescue Plan.

TurboTax tax expert Lisa Greene-Lewis says many parents may not understand how much the Child and Dependent Care Credit has grown.

Who may apply for this position?

Tax credits will be extended to parents and children who helped support a qualifying worker or job seeker throughout the year 2021.

According to the IRS, a person qualifies as a qualified individual if:

a dependant kid under the age of 13

Someone you live with for more than six months of the year who cannot take care of oneself, be they a spouse or a dependant of any age.

As a result, those who are caring for older and adult disabled children and those who are taxpayers who claim elderly relatives and pay for their care benefit from the latter provision.

There is no age restriction when a child has a handicap, Greene-Lewis added.

As with the Child Tax Credit and stimulus payments, there are certain income restrictions on this tax credit. For those earning more than $125,000, the credit percentages are lowered by 1 percent for every $2,000 in adjusted gross income. For example, someone making $127,000 a year can claim 49% of their child care expenditures.

A maximum of 20% of child care costs can be deducted for families earning more than $183,000 per year. But for households making more than $428,000.

Caruso said that to take advantage of the benefit, married couples must submit a joint tax return. “Those married but filing alone are often not entitled to the credit,” she said.

How do you know whether costs are legitimate?

To be eligible for the Child and Dependent Care Credit, parents must have spent money caring for their children and dependents to work or search for a job. Adult daycare expenditures can be claimed by those who pay for the care of elderly relatives.

In-home or out-of-home care is available, from nannies to child care establishments. In addition to the provider’s name and Social Security number or EIN, the IRS asks parents to click a box indicating whether they are a household employee when filing their tax returns. If you want to claim a tax credit, you’ll need to fill out this form.

Day programs are eligible. However, overnight camps do not qualify since they are not required for a parent to work or seek a job.

According to the IRS, programs that provide care for children before and after school are also tax-deductible.

It is possible to claim a cost for care supplied by a relative who is not a member of your family.

It may be a summer camp or a sports camp, according to Greene-Lewis, as long as it allows you to work or seek a job in the meanwhile.

What are the remaining costs?

The IRS does not recognize all expenses as tax-deductible, just as there is a distinction between overnight and day camps.

According to the IRS, private school tuition is not eligible for the Child and Dependent Care Credit since it is considered an educational cost rather than a child care expense. On the other hand, the IRS argues that pre-and post-school programs are qualified.

To qualify, care must be delivered by relatives who are not dependents or spouses of the patient. Essentially, the IRS states that you cannot claim a tax credit for paying your older teenage kid to care for a younger child. To deliver your spouse to care for their child is a waste of time and money.

Suppose I worked from home, went to school, or was otherwise unable to commute to an office?

According to the Internal Revenue Service (IRS), if a parent is unemployed or underemployed, they are not eligible for child support, according to the Internal Revenue Service (IRS).

The IRS considers parents to be working if their child is enrolled full-time in school during any given month.

Work might be full-time or part-time for an employer or yourself in your own company or partnership. Alternatively, it might take place both inside and outside of your house.

The credit assists those seeking a job, but a taxpayer must have earned some money for the year to receive it. So if you tried to get a job but were unsuccessful, you won’t be able to claim the tax credit in 2021.

In the following year, what will happen to the tax credit?

Extending the Child and Dependent Care Credit only applies to the 2021 tax year; individuals are now completing their forms for that year on the American Rescue Plan’s enhanced version of the credit.

The tax credit will revert to its old form in 2022. ” As a result, parents who claim the credit next year will only be able to claim the primary maximum benefit of $2,100.

Also, Read You Need to Claim Child Tax Credit Even with Advanced Payments: IRS

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