The Child and Dependent Care credit might not be getting as much attention as the monthly child tax credit payments that recently started hitting parent’s back accounts, but its’ expansion could greatly impact millions of Americans and their 2021 tax returns. The enhancement of the Child and Dependent Care credit, included as a provision of the American Rescue Plan Act of 2021, features several changes for 2021 only:
The credit is now refundable
The credit amount has been raised to 50% of paid expenses, up from 35% in 2020
The maximum amount of expenses eligible for the credit has been raised to $8,000 for one dependent and $16,000 for two or more
The expansion of the credit means it could impact returns by up to $4,000 for one dependent and up to $8,000 for two or more. For 2021, the phaseout rules do not apply for those making less than $125,000. This expansion has three positive outcomes for taxpayers; more taxpayers qualify for the credit, the size of the credit has increased more than two-fold, and the credit can directly put money in taxpayers’ pockets who do not normally receive a refund.
It is important for taxpayers to keep records of any dependent care expenses including daycare receipts, before and after-school programs, transportation to and from care providers and payments to babysitters, nannies, housekeepers. Additionally, people should know the risks of claiming care expenses paid “under the table” (ex. a teen babysitter or nanny) as these may not always be reported as income by the provider. To qualify for the credit, dependents must fit one of the criteria below:
- Be under the age of 13
- Be unable to care for themselves if 13 or older (ex. a spouse or adult dependent who is impaired and has lived with the taxpayer for more than half the year)
- Be physically or mentally incapable of self-care – even if their income was $4,300 or more
Please contact your Henry+Horne advisor if you are unsure whether you can claim care expenses for a dependent.