Preschool Tax Credit Rules for the 2021 Tax Year

March 01, 2022 by Carolyn Richardson, EA, MBA
Two Preschoolers Reading

Married filed jointly re: Child Tax Credit: There is a $8,000 limit on preschool tax credit. My question is can we claim $8,000 of the $12,000 we spent on preschool for our 4 year old? or are we unable to claim any of it as we spent over $8,000? Please Help!!!

-Raymond



Hello Raymond,

Thank you for your question. You asked, “My question is can we claim $8,000 of the $12,000 we spent on preschool for our 4 year old? Or are we unable to claim any of it as we spent over $8,000? Please Help!!!”

It sounds like you are familiar already with the expense limits for the Child and Dependent Care Credit for 2021, and that’s great! As you already know, the 2021 expense limit for this credit is $8,000 for one qualifying child, and $16,000 for two or more qualifying children. The credit is a percentage of those expenses, and that percentage varies depending on your income level. In previous years, the expense amount was lower ($3,000 for one child, $6,000 for two or more), but the percentage bottomed out at 20% of the expenses. For 2021, the expenses have more than doubled, and the credit percentage can be anywhere from 50% to 0%, depending on your income. So, the maximum credit you can claim is $4,000 per child, up to $8,000 for two children. Also, in previous years, the amount of the credit was limited to your tax liability, so if your tax liability was $0, you didn’t get the benefit of this credit. But for 2021, the Child and Dependent Care Credit was made fully refundable, meaning you can receive the full benefit of the credit even if your tax liability is low.

You might want to refer to a previous blog we wrote on the topic of pre-school tuition, which you can find here.

But the short answer to your question is that you don’t need to worry. Since you have one qualifying child, you can claim up to $8,000 of your preschool tuition as qualified expenses for purposes of the Child and Dependent Care Credit. The remaining $4,000 cannot be claimed. It is very likely that if you enter more than $8,000 as your expenses into your tax software, it will automatically limit it to $8,000. But just spending more than the limit doesn’t disqualify you from claiming the credit. Also, because the credit is fully refundable for 2021, even if your tax liability is less than $4,000, you will receive a tax benefit for the full amount of the credit. The credit is treated as an additional payment on your 2021 return.

Sadly, the credit returns to the old rules for 2022, meaning you will be limited to claiming only $3,000 of your pre-school tuition for your four-year-old on your 2022 return. Enjoy the extra cash while you can!

Sincerely,

Carolyn Richardson, EA, MBA

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Carolyn Richardson, EA, MBA
Learning Content Managing Editor

 

Carolyn has been in the tax field since 1984, when she went to work at the IRS as a Revenue Agent. Carolyn taught many classes at the IRS on both tax law changes and new hire training. In 1990, she left the IRS for a position at CCH, where she was a developer on both the service bureau software and on the Prosystevm fx tax preparation software for nearly 17 years. After leaving CCH she worked at several Los Angeles-based CPA firms before starting at TaxAudit as an Audit Representative in 2009. Carolyn became the manager of the Education and Research Department in 2011, developing course materials for the company and overseeing the research requests. Currently, she is the Learning Content Managing Editor. 


 

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