Child and Dependent Care Tax Credit Drops $6K After Pandemic Expansion Expiry

Like many other tax credits, the child and dependent care tax credit (CDCTC) saw a significant reduction after a pandemic induced legislative expansion.

The CDCTC has now returned to a maximum credit amount of $2,100 instead of the pandemic expanded $8,000.

Income thresholds and the percentage of child care expenses deductible also dropped considerably.

This means that for tax payers who claimed the credit for the prior tax year, will see a significant drop in the benefit they can take for the credit when they file their tax returns.

Get the latest money, tax and stimulus news directly in your inbox

What is the child and dependent care tax credit (CDCTC)

The CDCTC credit is provided to working parents or guardians to offset the costs (expenses) of care giving services for their children or other dependents with disabilities in their household.

Parents who are “full-time” students or looking for work and require care for their dependents in order to attend “school” are also eligible for this credit.

However you or your spouse must have must have had “earned income” in the applicable tax year, meaning money earned from a job (investment income does not count) to claim the tax credit

The CDCTC has also returned in 2022 to being nonrefundable tax credit vs a refundable credit. In 2021, the CDTC boosted refunds if you didn’t have any tax liability to deduct the credit against.

But in 2022, you can only use the credit to reduce your taxable income, like other deductions. So unfortunately, your refund won’t be larger because of this credit.

There are also stringent qualification rules for this credit and how much you can deduct, which includes prescribed phase-out income limits. The latest credit amounts and qualifying income thresholds are shown below

Tax YearQualifying Expense LimitMaximum CreditMin to Max Earned AGI
Phase-out Ranges
(% expenses deductible)
$3,000 (1st dep),
$6,000 (2+ deps)
$1,050 (1st dep)
$2,100 (2+ deps)
$0 to $15,000 (35%)
$15,001 to $43,001 (34% to 20%)
Over $43,001 (20%)
2022$3,000 (1st dep),
$6,000 (2+ deps)
$1,050 (1st dep)
$2,100 (2+ deps)
$0 to $15,000 (35%)
$15,001 to $43,001 (34% to 20%)
Over $43,001 (20%)
2021*$8,000 (1st dep),
$16,000 (2+ deps)
$4,000 (1st dep)
$8,000 (2+ deps)
$0 to $125,000 (50%)
$183,00 to $400,000 (20%)
$400,000 to $438,000 (20% to 0%)
*2021 limits were boosted with additional pandemic ARPA funding. Source: IRS Pub 503

How to calculate your credit amount

As you can see in the table above, the more you earn the lower the percentage of eligible child and dependent expenses can be used in factoring in your credit amount.

The maximum credit you can get is calculated by multiplying qualified dependent care-related expenses by the % Expenses Deductible that is applicable to the income range you fall into. This expense percentage deduction phases out with income, and you can see the full table below.

So it you spent $10,000 on work-supporting child care expenses in 2021 and had an AGI of $100,000, you can claim 10,000*50%, or $5,000 for the CDCTC, if you had 2 or more dependents.

This maximum credit amount drops to $2,100 in 2022 (and in 2023 unless adjusted again) since the overall cap and % deductible dropped. Further the credit is non-refundable meaning you can only offset any credit amounts against your taxable income (AGI on Form 1040).

So for example in 2022, assume a married couple (filing a joint return) earning $90,000 has three dependent children and their total child care expenses for the year was $8,000. This was directly out-of-pocket and not offset via a dependent FSA (see section below) or employer subsidy.

Based on their income and dependent count they can offset 20% of their qualified expenses (up to the maximum), per the table above. This equals, 0.2*8,000 = $1,600; which is the amount they can use to reduce their taxable liability.

You must complete Form 2441 and attach it to your 1040 return to claim the credit. I strongly recommend using online tax software packages like TurboTax or E-file to guide you through the sometimes confusing and complex calculations to determine how much of the credit you can get.

In addition to the above income and deduction thresholds, you also need to meet other qualifying criteria as discussed in the next section.

2022 CDTC Phase-out Deductible %
2022-2023 CDTC Phase-out Deductible %

Other qualifying criteria

In addition to income limits the IRS (Tax Topic 602, Publication 503) has also specified other key criteria to be eligible for the CDCTC. This includes:

  • You can only deduct child and dependent care services for a qualifying child under the age of 13, who you claim as a dependent on your tax return for the entire year. A child cannot be claimed in two separate returns for the same tax year, without causing the IRS to flag (and likely hold) both returns.
  • You can claim the CDCTC for your spouse or other dependent, if that person is unable to take care of himself or herself (disabled) and has lived in your home for at least half the year

You cannot claim the credit for your able-bodied spouse, ex-spouse or relative even if they are a dependent on your tax return and undertaking care-giving duties while not working elsewhere.

Other dependent credits you can claim

Even if you cannot claim some or all of the child and dependent care credit, there are certain other tax credits that you may be eligible, which can further reduce your tax liability or increase your refund.

This includes the Child Tax Credit (CTC), and Earned Income Tax Credit (EITC). Also note that qualifying for one of these other child/dependent credits does not affect a tax payers eligibility for the child and dependent care tax credit.

You can also save from a tax perspective on dependent care expenses via opening a dependent care flexible savings account (D-FSA) that you can fund with pre-tax dollars and lower your taxable income. If you do use the Dependent FSA to cover child-care expenses, you cannot “double-dip” and claim that amount when figuring your CDCTC.

Several states also offer additional child and dependent related tax credits, which you should consult your local state tax/revenue agency website for and claim when filing your state tax return.

Using a reputable tax software package (like TurboTax or E-file) can also systematically ensure that you claim all the federal and state credits you are eligible for based on your income, dependents and other qualifying criteria.

Subscribe via email or follow us on Facebook, Twitter or YouTube to get the latest news and updates

Leave a Comment