Working parents are eligible for two tax benefits to offset child care costs: the child and dependent care tax credit and the exclusion for employer-provided child care. The child and dependent care tax credit CDCTC provides a credit worth between 20 and 35 percent of child care costs for a child under age 13 or any dependent physically or mentally incapable of self-care. Higher credit rates apply to families with lower adjusted gross income. The credit is nonrefundable so it can only be used to offset income taxes owed—in other words, any excess credit beyond taxes owed is forfeited.
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The coronavirus pandemic has created child-care issues for many families. Since the onset of COVID, 48 states and the District of Columbia ordered or recommended school closures for the remainder of the — academic year. Whether schools will reopen in the fall and, if so, how they will operate are issues that remain largely uncertain as policymakers weigh possible health risks against the benefits of in-person instruction. If schools do not fully reopen in the fall, child-care costs will increase because parents will need to obtain care for their children during traditional school hours. The Child and Dependent Care Credit CDCC , a tax credit based on income and child-care expenditures, may help families mitigate increased child-care costs due to the pandemic.
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While stimulus checks and monthly child tax credit payments have gotten more attention, the recently enacted American Rescue Plan Act offers another benefit for families with younger children — an enhanced child and dependent care credit for Not only will millions of families get a larger tax credit when they file their tax return next year, but many more Americans will get the full credit amount for It will also generate tax refunds for many families, which is something the credit didn't do before. These enhancements will make a significant impact on the bottom line for millions of people with childcare expenses this year. The changes are only temporary, though.
Paying for child care or adult dependent care is one of the steepest monthly expenses many families face. But without care, parents may not be able to leave home to earn a living or go to school. However, various rules and exceptions make the tax credit a bit more complicated than it seems.