Child and Dependent Care Credit - Expanded for 2021
One of the lesser talked about provisions of the American Rescue Plan Act is the expansion of the Child and Dependent Care Credit. The American Rescue Plan increased and expanded the Child and Dependent Care Tax Credit, making more people eligible and increasing the total credit to $4,000 for one qualifying individual and $8,000 for two or more.
What should I know about the 2021 child and dependent care credit?
You could be eligible to receive up to 50% back as a tax break or refund for 2021 child care-related expenses. The amount you'll be able to claim maxes out at $8,000 for one dependent and $16,000 for two or more. You will need to start gathering receipts and other proof now to make sure you can claim the tax break when you file your income tax return next year.
In previous years -- including tax year 2020 -- the maximum amount you could claim for multiple children was $6,000. Under the new law, you'll be able to claim up to $16,000 in child care expenses for multiple children and up to $8,000 for one child or dependent alone.
In brief, for the 2021 tax year, you could get 50% back for up to $8,000 of child care and similar expenses (and up to $16,000 of expenses for two or more dependents).
|💰 Before the American Rescue Plan, the child and dependent care credit was nonrefundable, meaning it could reduce your tax bill to zero but you would not receive a refund on anything left over. Now, the credit is fully refundable, meaning that you will receive money for it even if you don't owe taxes.|
Calculate your tax balance based on the 2021 Child Care Credit
What are the income requirements?
To qualify, you must have earned income, such as wages from a job or unemployment. If you are married and filing a joint tax return, your spouse must also have earned income. (Exemptions apply to full-time students and people receiving disability.)
For the 2021 tax year, the credit amount begins to phase out when the taxpayer's income or household AGI, or adjusted gross income, reaches $125,000. The credit is decreased by 50% for any amount between $125,000 and $183,000, where it is then phased out to 20%. This 20% lasts until the income reaches $400,000. The credit rate eventually completely phases out for families earning $438,000 or more.
What should I know about eligibility for my dependents?
Dependent must fit one of the following criteria:
Be under the age of 13, or
Be unable to care for themselves if 13 or older (for example, if you have a spouse or older dependent who is impaired and incapable of caring for themselves, and has lived with you for more than half the year, or
Be physically or mentally incapable of self-care -- even if their income was $4,300 or more.
What counts as a qualifying expense for the credit?
- Day care expenses
- Before and after school care programs
- Day camp
- Babysitters, nannies, housekeepers. Note of Caution: Parents who pay their babysitter's cash "under the table" can't claim the child care tax credits since the income may not be claimed or documented by the provider.
Employer-provided dependent care assistance increase
The ARPA raised pretax contribution limits for dependent care flexible spending accounts for 2021. The Contribution limit was previously 5,000 and was now increased to $10,500 for single taxpayers and married couples filing jointly.
State child and dependent care credit
In addition to the IRS, your state might offer a similar credit of it own so please reach out to your accountant to learn more. You can learn more about the New York child and dependent care credit here.
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