Dependent Pages

Child Care Tax Deductions

Child Care

As a result of the American Rescue Plan Act or ARPA, the Child Tax Credit for Tax Year 2021 can be worth from $3,000 to $3,600 per qualified child, depending on the age of the child(ren) and your total income.

If you pay for daycare so that you can work (or look for work), you may be able to take advantage of the Child and Dependent Care Credit; use the CAREucator tool to see if you qualify. For 2020, this credit was worth up to 20% to 35% of up to $3,000 of child care or similar costs for a child under 13, or up to $6,000 for 2 or more dependents. The exact amount depends on the number of children and the amount you spent on childcare; see information on foster children and taxes.

Important: For 2021 Returns only, as part of the American Rescue Plan Act, the Child and Dependent Care Credit is now worth up to $8,000 for married filing jointly taxpayers and up to $4,000 for single taxpayers.

When you prepare and eFile your Taxes via the Tax App, it's very simple and error free to apply this deduction.

Dependents, Deductions, and Credits

It is critical to get a Social Security Number for your child if you want to receive tax benefits. You will need to claim your child as a dependent on your tax return; to do this, you will need a Social Security Number for your child. If you fail to report the Social Security Number for each dependent, you may be subject to a $50 fine and your tax refund may be delayed until things are straightened out.

You can request a Social Security Card at the same time you apply for a birth certificate. Otherwise, you will need to file a Form SS-5 with the Social Security Administration and provide proof of the child's age, identity, and U.S. citizenship.

Since you will be claiming an extra dependent and your tax bill will be reduced, you can cut back on tax withholding from your paychecks. You need to file a new W-4 form with your employer to claim additional withholding by updating your information and potentially adjusting it by a dollar amount. You can also take the child credit into account on your W-4 to reduce your paycheck withholding even more.

Your Filing Status

If you are single, having a child may allow you to file as a Head of Household rather than using the single filing status. This will give you a bigger standard deduction and more advantageous tax brackets. To qualify as a Head of Household, you must pay more than half the cost of providing a home for a qualifying person.

EIC Tax Credit: The Earned Income Tax Credit is worth more if you have children. In 2021, the EITC can be worth up to $6,728 per taxpayer for individuals or couples who have 3 or more qualifying children. Simply use the EICucator tool to see how this credit applies to you.

Another way you can save on taxes when you have a child is to have a childcare reimbursement account at your work. These accounts, sometimes called flex plans which may be a type of Flexible Spending Arrangement, let you move up to $5,000 a year of your salary into a special account that you can then use to pay child care bills. Note: For 2021, as part of ARPA, this amount is now $10,500 for all filing statuses excluding married filing separately where the limit is $5,250.

Money that you put into the account lets you avoid both federal income and Social Security taxes, so it could easily save you more than the value of the Child and Dependent Care Tax Credit. But remember, you can't use both the reimbursement account and the tax credit. Although you generally can only sign up for a flex account during open season, most companies allow you to make mid-year changes in response to certain life events such as the birth or adoption of a child.

Adoption Tax Credit: If you have added to your family by adopting a child, there’s a tax credit to help reimburse the cost of adoption. The Adoption Tax Credit is worth as much as $14,440 per child for 2021. If you adopted a special needs child, you can claim the full credit even if you did not pay any qualified adoption expenses.

College Savings Deductions: Time flies and before you know it, your child will be ready for college.  It’s a good idea to start saving early on for those college bills. Congress has some tax incentives to help parents save. One option is a Section 529 state education savings plan. Contributions to these plans are not deductible, but earnings grow tax-free and payouts are tax-free if the money is used to pay qualifying college bills. Many states give residents a state tax deduction if they invest in the state's 529 plan.

You may also want to put money into a Coverdell education savings account (ESA) for your child. You can fund up to $2,000 a year for any beneficiary. Again, there is no deduction for deposits, but earnings are tax-free if they are used to pay for education expenses. ESA money can also be used for elementary and high school expenses in addition to college costs. Read about student tax information and tips.

Other refundable and non-refundable Tax Credits.

IRAs for children advantageously utilize compound interest, making small investments, especially when a child is young, positioned for immense growth. However, in order to open an IRA, a person must have earned income from a job or self-employment which is not the case with most children. You can’t use money from gifts or investments either. As soon as your child starts earning some money - babysitting or delivering papers, for example, or helping out in the family business - he or she can open an IRA. The power of long-term compounding makes this a great idea.

Nanny Tax: If you hire someone to come into your home to help care for your child, you might be considered an employer in the eyes of the IRS and face a whole new set of tax rules. If you hire your nanny or caregiver through an agency, the agency may be the employer and have to take care of all the paperwork. But if you're the employer and you paid $2,000 or more in 2020, you are responsible for paying Social Security and unemployment taxes for your caregiver, and reporting the wages you pay to the government on a W-2 form.

Foster Child: Learn more about the foster child tax implications as a foster parent.

See what other tax deductions you may qualify to claim on your 2021 Tax Return.