For eligible families, the new American Rescue Plan Act (ARPA) provides an enhanced child and dependent care credit for 2021. The credit applies to expenses for care of qualifying children up to age 13 so the taxpayer can work.
The credit reduces the tax bill dollar for dollar.
Who qualifies?
To qualify for the credit, your childcare expenses must be “employment related.” In other words, the costs must be necessary for you and your spouse to work. The expenses must be for the care of your child, stepchild, foster child, brother, sister, or stepsibling — or a descendant of any of these — who is younger than 13, lives in your home more than half the year, and doesn’t provide over half of his or her own support for the year. Qualifying expenses also include the care of a spouse or dependent who is handicapped and lives with you at least half the year.
The most common qualifying expense is the amount you pay to a day care center, nanny or nursery school. Sleep-away camp doesn’t qualify. The cost of kindergarten or higher grades also doesn’t qualify, as that is an education expense. However, the before- and after-school program costs may qualify.
To claim the credit, you must file a joint return if you’re married. You also must provide the caregiver’s name, address, and Social Security number (or tax ID number for a day care center or nursery school), along with the Social Security number(s) of children receiving the care.
The 2021 credit is available when you or your spouse has a principal residence in the U.S. for more than half of the tax year.
What are the limits?
When calculating the credit, several limits apply. First, qualifying expenses are limited to the income you or your spouse earn from work, self-employment, or certain disability and retirement benefits — using the figure for whichever of you earns less. Under this limitation, if one of you has no earned income, you may not claim the credit. In some cases, if one spouse has no actual earned income and is a full-time student or disabled, he or she is considered to have a monthly income of $250 (for one qualifying individual) or $500 (for two or more qualifying individuals).
For 2021, the first $8,000 of care expenses generally qualifies for the credit for one qualifying individual; the amount increases to $16,000 for two or more.
If you receive tax-exempt benefits from an employer-sponsored dependent care assistance program, the qualifying expense limits are reduced by the excludable amounts you receive.
How much is the credit worth?
If your adjusted gross income is $125,000 or less, the maximum credit amount is $4,000 for taxpayers with one qualifying individual and $8,000 for taxpayers with two or more qualifying individuals. The credit phases out using a complicated formula, phasing out completely when the taxpayer’s AGI is greater than $440,000.
These are the essential elements of the enhanced child and dependent care credit in 2021. Contact TrueBlaze Advisors if you have questions.