How do I calculate the Child and Dependent Care Credit?

Changes to the credit for child and dependent care expenses for 2021. For 2021, the American Rescue Plan Act of 2021 (the ARP) increases the amount of the credit for child and dependent care expenses. It also makes the credit refundable for taxpayers that meet certain residency requirements, increases the percentage of employment-related expenses for qualifying care considered in calculating the credit, and modifies the phase-out of the credit for higher earners. For 2021, you may claim the credit on qualifying employment-related expenses of up to $8,000 (previously $3,000) if you had one qualifying person, or $16,000 (previously $6,000) if you had two or more qualifying persons. The maximum credit in 2021 increases to 50% of your employment-related expenses, which equals a maximum credit of $4,000 if you had one qualifying person (50% of $8,000), or $8,000 (50% of $16,000) if you had two or more qualifying persons. The more a taxpayer earns, the lower the percentage of employment-related expenses that are considered in determining the credit. Under the ARP, the adjusted gross income level at which the credit percentage starts to phase out is raised to $125,000 for 2021. Above $125,000, the 50% credit percentage goes down as income rises. For 2021, the credit figured on line 9a is unavailable for any taxpayer with adjusted gross income over $438,000; however, you may still be eligible to claim a credit on line 9b. See the instructions for line 8 for the 2021 phaseout schedule. To see if you meet the residency requirements to qualify for the refundable credit, see the instructions for line B. The refundable credit is reported on line 10. The nonrefundable credit is reported on line 11. For more information about the credit, see Pub. 503, Child and Dependent Care Expenses, available at IRS.gov/Pub503, and frequently asked questions at IRS.gov/CDCCFAQS.

The credit is a percentage, based on your adjusted gross income, of the amount of work-related child and dependent care expenses you paid to a care provider for a qualifying individual*. The maximum eligible to be multiplied by the percentages is $8,000 per child, maximum of $16,000. These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income.

Note: While you may be able to take this credit if your spouse is looking for work or is a student, these circumstances are not supported. Both spouses must have worked in order to claim this credit.

*For purposes of the child and dependent care credit, a qualifying individual is:

1. Your dependent qualifying child who is under age 13 when the care is provided,
2. Your spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the year, or
3. Your dependent who is physically or mentally incapable of self-care, and who has the same principal place of abode as you for more than half of the year. For this purpose, whether an individual is your dependent is determined without regard to the individual's gross income, whether the individual files a joint return, or whether you are a dependent of another taxpayer.

On the credits page of the federal return entries, select the Child and Dependent Care Expenses.  Enter the care provider information and the amount paid then select the dependent(s) that amount applies.  The OLT software will complete the calculations for the form 2441.