The IRS has issued a set of questions and answers related to the enhanced and refundable child and dependent care credit for 2021 that was included in the American Rescue Plan Act of 2021.[1]

The 2021 Credit

The 2021 version of the credit operates much like the credit in prior years, except that the credit is refundable, applies to an increased amount of such expenses, and the maximum credit is 50% of such expenses.

Question 2 notes who is a qualifying person for whose care the credit can be claimed:

Q2. Who is a qualifying person? (added June 11, 2021)

A2. A qualifying person is:

• Your dependent who is under age 13 when the care is provided;

• Your spouse, if your spouse isn’t mentally or physically able to care for himself or herself and lives with you for more than half the year; and

• A person who isn’t mentally or physically able to care for himself or herself, lives with you for more than half the year, and either:

  • Is your dependent, OR

  • Would have been your dependent except that (i) he or she receives more than a certain gross income amount ($4,300 in 2021), (ii) he or she files a joint return, or (iii) you (or your spouse in the case of a joint return) can be claimed as a dependent on someone else’s return.[2]

Question 3 outlines the definition of being mentally or physically unable to care for oneself:

Q3. What does “physically or mentally not able to care for oneself” mean? (added June 11, 2021)

A3. Persons who can’t dress, clean, or feed themselves because of physical or mental problems are considered not able to care for themselves. Persons who must have constant attention to prevent them from injuring themselves or others also are considered not able to care for themselves.[3]

Unlike the credit in prior years, this credit phases out entirely at higher income levels.

Q5. Can this 50-percent amount of work-related expenses be reduced? (added June 11, 2021)

A5. Yes. The amount of your adjusted gross income determines the percentage of your work-related expenses that you are allowed as a credit. For this purpose, your income is your “adjusted gross income” shown on your Form 1040, 1040-SR, or 1040-NR.

For 2021, the 50-percent amount begins to phase out if your adjusted gross income is more than $125,000, and completely phases out if your adjusted gross income is more than $438,000.[4]

Residency Rules for the Refundable Portion of the Credit

The FAQ contains information on the residency rules in place to be eligible to receive a refund of the credit in excess of the amount of tax paid by the taxpayer.  Question 8 outlines the general rules:

Q8. Are there special residency requirements for the refundable portion of the credit? (added June 11, 2021)

A8. Yes. To be eligible for the refundable portion of the credit for 2021, you must have your main home in one of the 50 states or the District of Columbia for more than half of the tax year. Your main home can be any location where you regularly live. Your main home may be your house, apartment, mobile home, shelter, temporary lodging, or other location and doesn’t need to be the same physical location throughout the taxable year. If you are temporarily away from your main home because of illness, education, business, vacation, or military service, you are generally treated as living in your main home during that time.[5]

But, as question 14 notes, those that live outside the United States (aside from special rules for those on assignment with the military) will not have access to the refundable portion of the credit:

Q14. For more than half of 2021, I will live overseas, but not in one of the five U.S. territories. Can I claim the refundable credit on my 2021 tax return? (added June 11, 2021)

A14. Generally, no. While you can claim the credit to offset your tax liability, the credit is refundable only if you have your main home in one of the 50 states or the District of Columbia for more than half of the tax year. Your main home can be any location where you regularly live. Your main home may be your house, apartment, mobile home, shelter, temporary lodging, or other location and doesn’t need to be the same physical location or in the same state throughout the taxable year. If you are temporarily away from your main home because of illness, education, business, vacation, or military service, you are generally treated as living in your main home.[6]

Question 15 details the special rules for the military:

Q15. My main home is in one of the 50 states or the District of Columbia, and I am in the U.S. military and stationed outside the United States for an extended period of time. Am I treated as living in my main home during that time for purposes of the credit? (added June 11, 2021)

A15. Yes. U.S. military personnel who are stationed outside the United States on extended active duty are considered to have their main home in one of the 50 states or the District of Columbia for purposes of qualifying for the refundable portion of the credit. For this purpose, “extended active duty” means any period of active duty pursuant to a call or order to active duty for a period in excess of 90 days or for an indefinite period.

Work-Related Expenses

The FAQs also discuss the rules related to work-related expenses that count for purposes of the credit.

Q16. What qualifies as a work-related expense? (added June 11, 2021)

A16. A work-related expense is an amount you (or your spouse in the case of a joint return) pay for the care of a qualifying person, or for household services if at least part of the services is for the care of a qualifying person, in order for you to work or look for work. Your work can be for others or in your own business or partnership. It can be full or part-time. It also includes actively looking for work. However, if you don’t find a job and have no earned income for the year, you can’t take this credit. See A9 and A10 for more information about the earned income requirement.[7]

The work-related expenses can be paid to a relative if certain requirements are met:

Q17. I pay my mother to watch my children during the day. Does this count as a work-related expense? (added June 11, 2021)

Q17. Yes, unless you can claim your mother as a dependent.

You can also count some work-related payments you make to other relatives, even if they live in your house. However, don’t count any amounts you pay to:

• A person you (or your spouse in the case of a joint return) can claim as a dependent;

• Your child who was under age 19 at the end of the year, even if the child isn’t your dependent; A person who was your spouse at any time during the year; or

• The parent of your qualifying person if your qualifying person also is your child and under age 13.[8]

The FAQ discusses requirements that must be met for care outside of the home to count as such work-related expenses for this credit:

Q18. My child receives care outside my home so that I can work. Does this count as a work-related expense? (added June 11, 2021)

A18. Maybe. To count as a work-related expense, the care must be for your dependent under the age of 13 or any other qualifying person who regularly spends at least 8 hours each day in your home. If the care is provided by a dependent care center, the center must comply with all state and local regulations that apply to centers. A dependent care center is a place that provides care for more than 6 persons (other than persons who live there) and receives a fee, payment, or grant for providing services for any of those persons, even if the center is not run for profit. For an exception to this rule, see Q19.[9]

The IRS specifically rejects the use of payments to overnight camps for this credit in Question 19:

Q19. My child will be attending a week of overnight camp. Does that camp count as a work-related expense? (added June 11, 2021)

A19. No. The cost of overnight camp does not count as a work-related expense.[10]

As well, the IRS provides that private kindergarten does not qualify as a work-related expense.

Q20. My child is enrolled in private kindergarten. Are the expenses to attend the private kindergarten work-related expenses? (added June 11, 2021)

A20. No. Expenses to attend kindergarten or a higher-grade level are not expenses for care, and therefore are not work-related expenses.[11]

But the IRS provides that after-school programs can qualify if all other requirements are met:

Q21. I send my child to after-school care. Are these expenses work-related expenses? (added June 11, 2021)

A21. Maybe. Expenses paid for before- or after-school care of a child in kindergarten or in a higher-grade level are expenses for care, and therefore are work-related expenses, provided all other conditions are satisfied (for example, the expenses allow you to work or to look for work).

[1] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021, https://www.irs.gov/newsroom/child-and-dependent-care-tax-credit-faqs (retrieved June 12, 2021)

[2] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[3] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[4] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[5] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[6] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[7] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[8] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[9] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[10] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021

[11] “Child and Dependent Care Tax Credit FAQs,” IRS website, June 11, 2021