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Use the child care tax credit to save on your 2021 taxes

Families can save up to $8,000 with this tax deduction for child care expenses

The child care tax credit can save families up to $1,200 a year

Once families find a qualified, trustworthy nanny, the next step is making sure their finances are in order. As long as the nanny is paid on the books, the vast majority of families will be eligible to take the Child or Dependent Care Tax Credit for their 2021 tax returns. However, according to the IRS, only about 6.5 million families do each year. In this article, we’ll go in-depth about this tax break to cover:

What are the qualifications for the child care tax credit?

Families can claim a child care tax deduction as long as they meet the following four requirements:

  1. Your family must have an adjusted gross income (AGI) of less than $440,000.
  2. The care must be for a child under the age of 13;
  3. Your family must need child care because both you and your spouse work, are looking for work or are full-time students;
  4. You must have qualifying child or dependent care-related expenses.

What expenses can I apply to the child care tax credit?

According to the IRS, you can apply any child care expense that is for the well-being and protection of your child. A few examples of qualifying expenses are:

  • Your nanny’s wages.
  • Fees paid to a placement agency to match your nanny with your family.
  • The household employer taxes paid on top of the nanny’s wages.
  • Dues for enrolling your child in a day care facility.
  • Tuition for a day camp (overnight camps are excluded).

How do I claim the child care tax credit on my 2021 taxes and what can I expect to save?

You will need to file IRS Form 2441 with your personal federal income tax return in order to claim the child care tax credit. The form asks for your care-related expenses for the calendar year and then calculates your savings based on a percentage determined by your adjusted gross income (AGI). The credit can be as much as 50%, but will gradually decrease to 1% for families nearing the $440,000 AGI limit.

You are limited on how much in child care expenses you can claim, based on how many kids you have. The expense limit is $8,000 for one child or $16,000 for two or more children. Consult the following table to see how much you can expect to save.

Income LevelTax Credit Savings
AGI < $125,00050%
AGI $125K – $185K50% – 20%
AGI $185K – $400K20%
AGI $400K – $440K20% – 1%
AGI > $440,000None

The tax credit savings in the two income levels with a sliding scale are calculated by decreasing the tax savings by one percent for every $2,000 of AGI you have. For instance, if your AGI is $155,000, your tax credit will be 35%. 

A tax savings scenario

A family hires a nanny to watch their two daughters ages 5 and 3 during the weekdays while they’re at work. They pay their caregiver $29,000 for the year, withhold the appropriate taxes from them and pay the required employer taxes. The family’s cost as a household employer breaks down like this:

Gross Wages for the Nanny
$29,000
Social Security Taxes
$1,798
Medicare Taxes
$420.50
Unemployment Insurance Taxes
$258
Total Employer Taxes
$2,476.50
Total Cost (before tax breaks):
$31,476.50

Since both parents work full-time, have a combined income of less than $440,000 and their children are under 13 years of age, they qualify for the child care tax credit. Their income level translates to a 20% tax credit which they can take on $16,000 of their child care expenses. This means the family will receive a tax break of $3,200, bringing their total cost to hire their nanny down to $28,276.50. That means the family is now saving a little more than $700 by paying legally!

What the example above should illustrate is that if you have qualifying child care expenses, you should always take advantage of the child care tax credit. Use our budgeting calculator to see how much you can save and visit our tax breaks page for information on other deductions you can take.

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