Mallory Vincent, MBA •
Have you maximized your potential tax benefits under the child and dependent care credit? The American Rescue Plan Act made several changes to the child and dependent care credit for the 2021 tax year including making this credit refundable for people who live in the United States for more than half the year. This means that you could get the full credit amount for 2021 and even generate a tax refund if you pay childcare expense for your children under age 13. This credit also covers expenses for the care of other people, including a spouse who was physically or mentally incapable of self-care and lived with you for more than have the year. Another example is someone who was physically or mentally incapable of self-care, lived with you for more than half the year, and either (1) was your dependent, or (2) could have been your dependent except that he or she received gross income of $4,300 or more, he or she filed a joint tax return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another person’s tax return.
Have you maximized your potential tax benefits under the child and dependent care credit? The American Rescue Plan Act made several changes to the child and dependent care credit for the 2021 tax year including making this credit refundable for people who live in the United States for more than half the year. This means that you could get the full credit amount for 2021 and even generate a tax refund if you pay childcare expense for your children under age 13. This credit also covers expenses for the care of other people, including a spouse who was physically or mentally incapable of self-care and lived with you for more than have the year. Another example is someone who was physically or mentally incapable of self-care, lived with you for more than half the year, and either (1) was your dependent, or (2) could have been your dependent except that he or she received gross income of $4,300 or more, he or she filed a joint tax return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another person’s tax return.
It is not too late to increase your withholdings for pre-tax dependent care FSA (flexible spending account) from $5,000 to the new maximum amount of $10,500 if you are going to pay at least that amount in childcare expenses in 2021 and your employer allows this annual limit. Another option, which may be the better option depending on your tax situation, is to maximize the child and dependent care credit. The maximum credit percentage for 2021 was increased from 35% to 50%. In addition, more childcare expenses are subject to the credit. The American Rescue Plan allows the credit for up to $8,000 in expenses for one child and $16,000 for multiple kids. Based on these changes, the highest 2021 child and dependent care credit available for this tax year is $4,000 if you have just one child and $8,000 for two or more children. If you have taken any dependent care benefits year to date, however, you would not be eligible for the full credit amount, as these reduce the total amount of qualified expenses used to calculate the credit.
Here is an example: Susan and Tommy have two children, Harry (age 3) and Melissa (age 1). Their expected 2021 AGI (adjusted gross income) is $100,000 for 2021. They expect to pay $14,000 for Harry’s childcare expenses and $18,000 for Melissa’s childcare expenses in 2021. Year to date in 2021, they have dependent care benefits withheld pre-tax from Susan’s workplace totaling $4,000. Assuming Susan decides to stop the dependent care benefit withholdings from her paycheck the child and dependent care credit would be calculated as follows:
$16,000 maximum childcare expenses for two children
(4,000) dependent care benefits taken year to date
$12,000 allowable childcare expenses used to determine credit
x 50% new percentage under American Rescue Plan (AGI under $125,000 so not limited)
6,000 child and dependent credit 2021
One item to note is the calculation of your credit for 2021 is that it may vary for families depending on the amount of dependent care benefits taken year to date and the expected AGI for 2021.
To maximize the credit, you may want to consider ceasing to take dependent care benefits through your workplace as these reduce the qualified expenses allowed for the child and dependent care credit. However, as noted in the example above, one area to consider before doing this is your 2021 AGI. The credit will not be reduced for an eligible family with an AGI of $125,000 or less. However, the percentage of the credit allowed is gradually reduced from 50% to 20% for families with an AGI between $125,001 and $183,001. The credit will remain the same for families with an AGI from $183,001 to $400,000, but then it is gradually reduced again from 20% to 0% for families with an AGI above $400,000. If your family has an AGI of over $438,000, you will not get a credit. Now is the time to reach out to your tax advisor to take a look at your individual tax situation and ensure that you are maximizing this tax benefit for 2021.
Here is an example: Susan and Tommy have two children, Harry (age 3) and Melissa (age 1). Their expected 2021 AGI (adjusted gross income) is $100,000 for 2021. They expect to pay $14,000 for Harry’s childcare expenses and $18,000 for Melissa’s childcare expenses in 2021. Year to date in 2021, they have dependent care benefits withheld pre-tax from Susan’s workplace totaling $4,000. Assuming Susan decides to stop the dependent care benefit withholdings from her paycheck the child and dependent care credit would be calculated as follows:
$16,000 maximum childcare expenses for two children
(4,000) dependent care benefits taken year to date
$12,000 allowable childcare expenses used to determine credit
x 50% new percentage under American Rescue Plan (AGI under $125,000 so not limited)
6,000 child and dependent credit 2021
One item to note is the calculation of your credit for 2021 is that it may vary for families depending on the amount of dependent care benefits taken year to date and the expected AGI for 2021.
To maximize the credit, you may want to consider ceasing to take dependent care benefits through your workplace as these reduce the qualified expenses allowed for the child and dependent care credit. However, as noted in the example above, one area to consider before doing this is your 2021 AGI. The credit will not be reduced for an eligible family with an AGI of $125,000 or less. However, the percentage of the credit allowed is gradually reduced from 50% to 20% for families with an AGI between $125,001 and $183,001. The credit will remain the same for families with an AGI from $183,001 to $400,000, but then it is gradually reduced again from 20% to 0% for families with an AGI above $400,000. If your family has an AGI of over $438,000, you will not get a credit. Now is the time to reach out to your tax advisor to take a look at your individual tax situation and ensure that you are maximizing this tax benefit for 2021.
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