Tax Tips: Expanded Child Care Credit – Taxpayer-Friendly Changes for 2021
The American Rescue Plan Act of 2021 (ARPA) makes major, but temporary, changes to the Child and Dependent Care Credit (CDCC).
If you have one or more qualifying individuals (usually your children) under your wing, you’re eligible for the CDCC.
The credit covers eligible expenses that you pay to care for one or more qualifying individuals so you can work, or (if you’re married) so both you and your spouse can work. If you’re married, to claim the CDCC, you generally must file a joint Form 1040 for the tax year in question.
Qualifying individuals are defined as your under-age-13 child, stepchild, foster child, brother or sister, step-sibling, or descendant of any of these individuals. The child must live in your home for over half the year and must not provide more than half of his or her own support.
A handicapped spouse or handicapped dependent who lives with you for over half the year can also be a qualifying individual.
Eligible expenses include payments to a day-care center, nanny, or nursery school. Costs for overnight camp don’t qualify. K-12 costs don’t qualify either because those are considered education expenses rather than care expenses. But costs for before-school and after-school programs can qualify. Costs of domestic help can also qualify, as long as at least part of the cost goes toward care of a qualifying individual.
The temporary changes available for the 2021 tax year only are summarized below.
Credit Is Potentially Refundable
For 2021, the CDCC is refundable if your main residence is in the U.S. for more than half the year. For joint-filing married couples, either spouse can meet this requirement.
Credit Will Be Much Bigger for Many Families
For 2021, the dollar limits on the amount of eligible expenses for calculating the CDCC are increased to $8,000 if you have one qualifying individual (up from $3,000) or $16,000 if you have two or more qualifying individuals (up from $6,000).
For 2021, the maximum credit rate is increased to 50 percent (up from 35 percent). The credit rate is reduced by one percentage point for each $2,000 (or fraction thereof) of AGI in excess of $125,000. So, the rate is reduced to 20 percent if your AGI exceeds $183,000.
For 2021, the maximum CDCC if you have AGI of $125,000 or less is $4,000 for one qualifying individual ($8,000 x 50 percent) or $8,000 for two or more qualifying individuals ($16,000 x 50 percent). Under the “regular” rules for tax years before and after 2021, the maximum credit amounts are only $1,050 and $2,100, respectively.
For 2021 the maximum CDCC if you have AGI of more than $183,000 is $1,600 for one qualifying individual ($8,000 x 20 percent) or $3,200 for two or more qualifying individuals ($16,000 x 20 percent), compared to $600 and 1,200, respectively, for tax years before and after 2021.
Credit Rate Is Further Reduced or Eliminated for High-Income Taxpayers
For 2021, the credit rate is 20 percent if your AGI is between $183,001 and $400,000. But once your AGI exceeds $400,000, a second credit-rate-reduction rule kicks in. Your rate is reduced by one percentage point for each $2,000 (or fraction thereof) of AGI in excess of $400,000. So, the rate is reduced to 0 percent if your AGI exceeds $438,000.
Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.