The American Rescue Plan Act of 2021 made the Child and Dependent Care Credit more generous and potentially refundable (up to $4,000 for one dependent and $8,000 for two or more dependents). In other words, there’s never been a better time to claim the Child and Dependent Care Credit if you qualify.
To claim this credit, your care provider must fill out a W-10. You may also need to fill out the form if you receive benefits from an employer-sponsored dependent care plan.
It’s certainly worth it to see if you qualify (and for this we recommend that you consult with a tax professional). For 2021, filers may use up to $8,000 of expenses paid in a year for one qualifying individual or $16,000 for two or more qualifying individuals. (When it comes time to figure out your qualifying expenses, remember that they must be reduced by the amount of any dependent care benefits provided by your employer, if those benefits were deducted or excluded from your income.) The percentage you can claim depends on your adjusted gross income—the more you earn, the lower the percentage you can claim and it’s unavailable to anyone with an AGI of over $438,000.
Do You Qualify for the Credit?
To see if you need to have your care provider fill out a W-10, first determine if you qualify for the credit for child and dependent care expenses. To qualify, the care must have been provided for one or more qualifying persons, generally a dependent child age 13 or younger when the care was provided. Certain other individuals, spouses and those who are incapable of self-care, may also be considered qualifying persons. (Note: each qualifying individual must be listed on your tax return.)
Next, consider why the care was provided. To qualify, the person (or couple, if married and filing jointly) claiming the credit must have sought care so they could work or search for employment. Further, the individual or couple filing must be considered earned income earners. Wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment all qualify individuals as having earned income. For married filers, one spouse may be considered as having earned income if they were a full-time student, or if they were unable to care for themselves.
Who did you pay for care? Qualifying funds spent for care cannot be paid to a filer’s spouse, a dependent of the filer, or to the filer’s child, unless that child will reach age 19 or older by the end of the year. (The rule for payments to the filer’s child does not change, even if the child is not the filer’s dependent.) Filers must identify care providers on their tax return.
There are just a few more qualifying details. To qualify, filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child. The qualifying person must have lived with the person filing for over one-half of the year. There are exceptions, for the birth or death of a qualifying person, and for children of divorced or separated parents.
IRS Form W-10
So, if you meet those criteria, then it’s time to make sure your care provider fills out a W-10. The form is simple to fill out, requiring only the provider’s name, address, signature and taxpayer identification number (usually their social security number). The form is only for your records; details about the provider will come when you fill out form 2441 for Child and Dependent Care Expenses.