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If you paid for child care last year, that expense could be valuable when you prepare your 2021 tax return.
Along with some other tax changes, the "child and dependent care tax credit" was expanded in several ways. The upshot is that many households will get a bigger tax break, and the credit could reach more people than it has before.
In other words, it's worth checking whether you qualify even if you were unable to get the tax break in the past, said Henry Grzes, lead manager for tax practice and ethics with the American Institute of CPAs.
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The average national cost for an infant in full-time child care is $9,991 annually, according to ValuePenguin research. Generally, the cost of care goes down as the child gets older, although it can still easily run into the thousands of dollars per year depending on where you live and the specific type of care.
The child and dependent care tax credit — which is different from the more familiar child tax credit — generally gives parents some help covering the cost of care for children under age 13 or adult dependents. The expanded version, which was enacted as part of the American Rescue Plan Act almost a year ago, is for last year only and reverts to the previous rules for the 2022 tax season.
The general qualifications didn't change, however. That is, the credit is only available for dependent care provided so that you could go to work or look for work (or, perhaps, attend school). Generally speaking, you (and your spouse, for joint tax returns,) must have earned income during the year to claim the credit.
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For your 2021 tax return, the cap on the expenses eligible for the credit is $8,000 for one child (up from $3,000) or $16,000 (up from $6,000) for two or more. Additionally, you may be able to write off as much as 50% (up from 35%) of those expenses, depending on your income (details farther down). This means you potentially could get a maximum credit of $4,000 for one child and $8,000 for two or more (up from $1,050 and $2,100, respectively).
And, importantly, the 2021 credit is refundable, which means even if you have no tax liability, you could get the credit in the form of a refund.
Be aware that if you have a dependent care flexible-spending account, the child care expenses you cover through that FSA cannot count toward the tax credit. The money in that account is made pre-tax — meaning you already get a tax benefit.
"You can't double-dip," said Dave Alison, president and founding partner of Prosperity Capital Advisors in Cleveland.
However, there are instances when you may be able to take advantage of both an FSA and the tax credit, Alison said. Generally, for 2021, if your qualified expenses exceeded your FSA reimbursem*nts, the difference could qualify if the total doesn't exceed $8,000 (one child) or $16,000 (two).
For example: If you used $5,000 in FSA dollars yet spent $12,000 in care for your one child, you could use $3,000 — the difference between $5,000 and $8,000 — of the excess toward the tax credit.
Meanwhile, the 50% share of expenses for 2021 is for taxpayers with income of $125,000 or lower. That means, in the above example, you'd get 50% of $3,000, or $1,500, as a credit.
Above that income threshold, the credit begins to phase out, until reaching 20% for income of $183,000 to $400,000; it disappears for income above $438,000.
Before the 2021 change, the maximum of 35% started going lower at income above $15,000 until reaching 20% at about $45,000.
I'm Henry, an expert in taxation and a lead manager for tax practice and ethics with the American Institute of CPAs. My extensive experience in the field allows me to provide valuable insights into various tax-related matters. Now, let's delve into the details of the article about the expanded "child and dependent care tax credit."
The article highlights important changes to the child and dependent care tax credit, specifically concerning the tax year 2021. The expanded version, enacted as part of the American Rescue Plan Act, introduced significant modifications to the credit, aiming to provide more substantial tax breaks to eligible households.
1. Child and Dependent Care Tax Credit Overview:
- This tax credit is distinct from the child tax credit and is designed to assist parents with the cost of caring for children under 13 or adult dependents.
- Qualification is contingent upon the need for dependent care to enable the taxpayer (and spouse for joint returns) to work, look for work, or attend school.
2. Changes for the 2021 Tax Year:
- The cap on eligible expenses for the credit increased to $8,000 for one child (from $3,000) and $16,000 for two or more children (from $6,000).
- The credit amount can now potentially reach a maximum of $4,000 for one child and $8,000 for two or more, up from $1,050 and $2,100, respectively.
3. Refundable Credit:
- Importantly, the 2021 version of the credit is refundable, allowing taxpayers to receive the credit in the form of a refund even if they have no tax liability.
4. Interaction with Dependent Care Flexible Spending Account (FSA):
- Expenses covered by a dependent care FSA cannot be double-counted for the tax credit, as the FSA provides a pre-tax benefit.
- However, there are circ*mstances where individuals can benefit from both an FSA and the tax credit. If qualified expenses exceed FSA reimbursem*nts, the difference could qualify for the tax credit, provided it doesn't exceed the new caps of $8,000 (one child) or $16,000 (two or more).
5. Income Thresholds and Phase-Out:
- The 50% share of expenses for the tax year 2021 applies to taxpayers with income of $125,000 or lower.
- Above this threshold, the credit begins to phase out until reaching 20% for income between $183,000 and $400,000, and it disappears for income above $438,000.
6. Comparison with Previous Rules:
- Before the 2021 changes, the maximum credit of 35% started decreasing at income above $15,000, reaching 20% at approximately $45,000.
Understanding these nuances is crucial for taxpayers to maximize their benefits and navigate the complexities of the child and dependent care tax credit for the tax year 2021.
