As mentioned in last week’s tax tip, the American Rescue Plan provided big tax breaks in 2021 that benefitted many families. Among them was the increased Child and Dependent Care Credit. For 2021, taxpayers could claim up to $8,000 of qualifying childcare expenses for one child and $16,000 for two or more children. Based on income, taxpayers were able to claim a maximum tax credit equal to 50% of these expenses. However, the enhanced credit expired at the end of 2021 and is not available for 2022.

2022 Changes

The credit has reverted to allowing a maximum of $3,000 of childcare expenses for one child and $6,000 for two or more children. Due to the lower phase outs, most qualifying taxpayers will be limited to a credit equal to 20% of the allowable childcare expenses. At just $15,000 of adjusted gross income, the credit begins reducing from 35% to 20%. Additionally, this credit was fully refundable with the 2021 provisions but has reverted to non-refundable for 2022.

The requirements to be a qualifying person for the Child and Dependent Care Credit have not changed.  Qualifying persons include:

  • A taxpayer’s dependent who is under the age of thirteen when the care is provided.
  • A taxpayer’s spouse who is physically or mentally unable to care for themselves and lives with the taxpayer for more than half the tax year.
  • Someone who is physically or mentally unable to take care of themselves and lives with the taxpayer for six months and is either the taxpayer’s dependent or would be the taxpayer’s dependent if it weren’t for exceeded income, filing a joint return, or being able to be claimed as a dependent on someone else’s return.

Due to the reduced amount and age limits of the Child and Dependent Care Credit, you may see changes in your tax liability for 2022. Please reach out to your tax advisor at Ketel Thorstenson to find out how this may impact your 2022 tax return.