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Child care tax credit returns to lower pre-COVID levels, but still worth a look

Fort Jackson Family Child Care center_Kris Gonzalez_FMWRC US Army Flickr CC
Photo by Kris Gonzalez via Flickr CC

Parenting presents many challenges. One of them is finding quality child care. The tax code can help a bit here if you, and your spouse if you're married, both work.

The Child and Dependent Care Credit offsets some child care expenses. Since it's a tax credit, it does that by reducing your tax liability dollar-for-dollar.

But if you're a working mom or dad who enjoyed the pandemic-prompted enhancements to the child care credit last year, get ready to be disappointed when you file your 2022 return.

The tax break afforded by the Child and Dependent Care Credit is not as generous now that it has returned to its pre-coronavirus status.

COVID increases ended: During the height of the COVID-19 pandemic, several benefits were created or enhanced to help those struggling with the virus' economic effects.

The child care credit was one of them. It substantially increased the amount of tax relief available to qualifying parents. It did so by expanding the dollar amount and percentage of costs that could be claimed, as well as upping the earnings levels so that that the credit was available to more taxpayers.

But that expanded help ended when the 2022 tax year started. The Child and Dependent Care Credit parameters have returned to their pre-coronavirus levels.

Here's a look at how the resumption of the prior rules apply now to child care costs claimed on your 2022 return.

Child eligibility is the same: First, the good news. While the credit was enhanced last year, some things, such as child qualifications, didn't change. So there's no unlearning of the temporary tax break rules.

For the youngster, that means —

  • The child must be younger than age 13 when the care was/is provided.
  • The child must be claimed as a dependent on your tax return, which means you must have a Social Security number for the youngster to enter on your Form 1040.
  • To be your qualifying child, a child must live with you for more than half the year and meet other requirements.

You can find more of those child tax dependency determinations in my post on the tests a child must meet to be your tax dependent.

Working parents only: Another thing that didn't change, or change back, when it comes to the Child and Dependent Care Credit is that it is only for working parents.

You, and your spouse if you're married, must have earned income from a job.

And in order to claim the credit, the child care you paid for was necessary so that you and your spouse could go to work or look for employment.

The Internal Revenue Service specifically points out that an expense isn't considered work related merely because you had it while you were working. The purpose of the expense must be to allow you to work.

As for just what that is, the IRS says whether your expenses allow you to work or look for work depends on the facts. So be ready to justify the cost if an examiner asks.

Also be aware of the limits on payments to certain child care providers. You can't claim any payments you made to the following to look after your child while you worked:

  • Your current spouse,
  • Your ex-spouse who is the child's parent,
  • Any dependent you list on your Form 1040, or
  • One of your other children who is 18 or younger, regardless of whether they are a dependent on your tax return.

That's right, getting your oldest teenage child to look after his younger sister is just cost of parenting that does not qualify for a tax break from Uncle Sam.

Return to reduced expense, percentage levels: The credit amount, or more specifically figuring it, is where the changes come into play for this filing season.

First, the total costs you can use to claim the credit have returned to their lower levels.

For the 2022 tax year, you can count up to $3,000 spent to care for one child, or $6,000 for two or more people. For 2021, the amounts were bumped up to $8,000 for the care of one child and $16,000 for two or more youngsters.

The percentage of your qualified expenses that you can claim also returns to a range from 20 percent to 35 percent, instead of the COVID-hiked maximum 50 percent level.

The credit still provides more for lower-income earners, but that top earning threshold again returns to prior levels. Instead of the six-figure earnings allowed under the COVID-19 enhancements, the top adjusted gross income level to claim any of the credit — specifically, 20 percent of your qualifying expenses — is $43,000.

That math, as shown in the table below, means that in real dollars, the most child care tax credit you can get as a lower-income working parent is $1,050 for care of one child or $2,100 for costs related to caring for two or more youngsters.

Care costs for 1 child

Care costs for 2 or more children

 x 35% 
$1,050 child care tax credit claim

 x 35% 
$2,100 child care tax credit claim

Those maximum Child and Dependent Care Credit amounts also earn this weekend's By the Numbers honors.

Refundability again gone: Finally, there's one other unwelcome return to this tax break. The temporary refundability of the child care credit is gone.

Last year, families got excess care credit amounts as refunds. Now, the credit returns to its nonrefundable status.

So if you get a $2,100 child care credit and owe $1,800 in taxes when you file, you can only zero out that $1,800 tax bill. The excess $300 from the child care credit cannot be sent to you as a refund.

Camp costs can count: The bottom line is that while the Child and Dependent Care Credit is beneficial, it's not as good as it briefly was under pandemic tax law changes. But any tax break is better than none.

So if you can resist the human tendency to bemoan things we lose, like increased tax credits, take some time to explore whether you can get a tax break for the child care costs you paid last year.

And as we creep closer to summer, keep in mind that the ubiquitous seasonal day camps that offer fun for kids, also can provide a tax break for parents. Yep, the costs of the daytime recreational offerings — and note, day camps only, not overnight operations like (geez alert!) Camp Granada, are eligible — can count toward the child care credit.

If your kiddos spent time at a day camp last year and you didn't hit the maximum allowable care expenses to claim, dig out those receipts. Then use the amounts to max out your child care credit.

As for this year's summer day camps, you better find one for your youngsters soon. They fill up quickly. Then put documentation of this year's costs into your 2023 tax record keeping system. You can use them to claim the credit when you file your return next year.

Not just for the children: Finally, note the name of the credit. Although I've focused in this post on costs to care for kiddos, the tax break also applies to care expenses of other dependents.

That could be older individuals, such as an aging relative who lives with you and needs on-site care while you (or your spouse) are at work.

If you can claim the credit for any age qualifying tax dependent, you'll do so on Form 2441. That's an excerpt below of page 1 showing the income ranges and percentages of costs used to figure the credit.

Form 2441 IRS child and dependent care tax credit percentages
See more tax forms and more about them at 2022's Talking Tax Forms and Tax Forms 2023.

You can find more about Form 2441 in its instructions, as well as through your tax software or by talking with your tax adviser.

You also might find these items of interest:







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