Child and Dependent Care Credit - Expanded for 2021

One of the lesser talked about provisions of the American Rescue Plan Act is the expansion of the Child and Dependent Care Credit. The American Rescue Plan increased and expanded the Child and Dependent Care Tax Credit, making more people eligible and increasing the total credit to $4,000 for one qualifying individual and $8,000 for two or more.

What should I know about the 2021 child and dependent care credit? 

• You could be eligible to receive up to 50% back as a tax break or refund for 2021 childcare-related expenses. The amount you'll be able to claim maxes out at $8,000 for one dependent and $16,000 for two or more.
• It's limited to the earned income of the parent with the lowest income, i.e. both parents have to earn at least $16,000 to get the maximum credit of $8,000.
• You will need to start gathering receipts and other proof now to make sure you can claim the tax break when you file your income tax return next year.
• In previous years - including tax year 2020 - the maximum amount you could claim for multiple children was $6,000. Under the new law, you'll be able to claim up to $16,000 in child care expenses for multiple children and up to $8,000 for one child or dependent alone.

Calculate your tax balance based on the 2021 Child Care Credit

What are the income requirements?

• To qualify, you must have earned income, such as wages from a job. If you are married and filing a joint tax return, your spouse must also have earned income.
• Please note that even if you have earned income but have other losses which result in a negative AGI you won't qualify for the credit.
• For the 2021 tax year, the credit amount begins to phase out when the taxpayer's income or household AGI, or adjusted gross income, reaches $125,000. The credit is decreased by 50% for any amount between $125,000 and $183,000, where it is then phased out to 20%. This 20% lasts until the income reaches $400,000. The credit rate eventually completely phases out for families earning $438,000 or more.

Are there special exemption rules for full-time students and people receiving disabilities?

There are special earned income rules for students. If you or your spouse are a full-time student, you will be treated as having earned an income of $250 if you have one qualifying person for any month you are a full-time student or not able to care for yourself. - In other words, although the new rules made the credit substantially more generous, they do not apply for students or people receiving disabilities as they will still be subject to the past threshold. 

Do I qualify if my spouse or I were unemployed in 2021? 

You or your spouse who is out of work during the year must be actively looking for employment, and the work-related expenses must be incurred so that you and/or your spouse can look for work. However, if you do not find a job and have no earned income for the year, you cannot take this credit. See Q16 and Q18 for more information about the earned income requirement.

What should I know about eligibility for my dependents?

Dependent must fit one of the following criteria:

• Be under the age of 13, or

• Be unable to care for themselves if 13 or older (for example, if you have a spouse or older dependent who is impaired and incapable of caring for themselves, and has lived with you for more than half the year, or

• Be physically or mentally incapable of self-care -- even if their income was $4,300 or more. 

What counts as a qualifying expense for the credit?

• Daycare expenses
• Before and after school care programs
• Day camp
• Transportation
• Babysitters, nannies, housekeepers. Note of Caution: Parents who pay their babysitter's cash "under the table" can't claim the child care tax credits since the income may not be claimed or documented by the provider.

Employer-provided dependent care assistance increase

The ARPA raised pretax contribution limits for dependent care flexible spending accounts for 2021. The Contribution limit was previously 5,000 and was now increased to $10,500 for single taxpayers and married couples filing jointly. The limit has not been extended for 2022.

State child and dependent care credit

In addition to the IRS, your state might offer a similar credit of its own so please reach out to your accountant to learn more. You can learn more about the New York child and dependent care credit here.

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