Americans Paying for Child & Dependent Care Can Expect an Enhanced Credit in 2021
Credit Increases and Becomes Refundable This Year
With millions of Americans expected to receive their 2021 Child Tax Credit advance payments beginning July 15, 2021, taxpayers have an additional credit opportunity to consider. Thanks to the American Rescue Plan Act of 2021, qualified taxpayers paying for child or dependent care can claim an enhanced child and dependent care credit for 2021.
Millions of Americans claim the Child and Dependent Care Credit every year. If you paid someone last year to care for your child so you and/or your spouse could work, you probably did, too.
Changes to the credit in 2021 are temporary, though. The Biden administration has publicly advocated to make the child and dependent care tax credit enhancements permanent, but Congress has not extended these as of this writing.
Background: 2020 Child & Dependent Care Credit
To get the credit in 2020, your child(ren) had to be under the age of 13 when they received childcare.
The credit has historically been a percentage of certain work-related expenses paid to a care provider to care for a child or disabled person. The credit is calculated using your adjusted gross income (AGI). It started at 35% and decreased one percent for each $2,000 that your AGI was over $15,000, with a floor of 20%. Last year, the maximum credit was $1,050 for those who had one qualified child or disabled person in their family (35% of $3,000 of eligible expenses); For those with more than one qualifying dependent, the maximum was $2,100 (35% of $6,000 of eligible expenses).
In 2020, the credit was non-refundable. This means if your tax bill before the credit was $300 and your credit was worth $500, only $300 of the credit was used, and the remaining $200 was lost and could not be claimed on your 2020 tax return.
2021 Looks Different
The credit is still calculated using your AGI. However, instead this year’s maximum is 50%, up from 35% last year. The credit is decreased by one percentage point for each $2,000 that your AGI is over $125,000. For those with an AGI between $185,000 and $400,000, the credit is 20%, with the credit becoming unavailable at $440,000.
Instead of capping expenses at up to $3,000 for one child and up to $6,000 for two or more, the American Rescue Plan moves this threshold up to $8,000 for one child and up to $16,000 for multiple.
The maximum credit is $4,000 for those who had one qualified child or disabled person in their family (50% of $8,000 of eligible expenses); For those with more than one qualifying dependent, the maximum is $8,000 (50% of $16,000 of eligible expenses).
For 2021, the credit is fully refundable. Using the example above of a $300 tax bill with a $500 credit, this means the remaining $200 will be added to the refund on your 2021 tax return.
Child and Dependent Care
The credit covers expenses paid to care for children under 13 years of age when the care was provided, but it also covers far more than that. The credit is available to taxpayers with expenses to care for:
- A spouse that lived with you for more than half of a year who was physically or mentally incapable of caring for themself.
- Someone mentally or physically incapable of taking care of themself who lived with you for more than half of the year. This person must have been either your dependent or could have been your dependent (except he or she received gross income of $4,300 or more, or they were claimed as a dependent on another person’s tax return). This includes elderly parents living with you if you claimed them as dependents on your tax return.
Rules & Stipulations Apply
This is a high-level overview of a complex piece of legislation. There are specific rules around what’s considered a work-related expense, the type of care provided, the identification of the care provided, and earned income requirements, to name a few. Make sure to consult with your tax advisor about your individual situation so you can maximize your benefits.