If you are paying a facility or an individual to watch your children this summer, you may benefit from the dependent care credit, often referred to as the “child care credit.”
The American Rescue Plan Act (ARPA) signed into law earlier this year increases the tax benefits associated with this credit for taxpayers with certain income levels.
To qualify for the credit, you must incur expenses to care for a child (or in some instances for a dependent relative under age 13). Qualifying expenses include payments to daycare centers, babysitters and summer day camps, including specialty camps for athletics or other similar specialty camps (but not overnight camps).
Prior to the ARPA, the maximum credit was 35%, but it was gradually reduced to 20% for most families, depending upon income levels. This nonrefundable credit was available for the first $3,000 of qualified expenses for caring for one child or $6,000 for two or more children. Thus, the maximum credit was generally 20% of $3,000 or $6,000 – either $600 (one child) or $1,200 (two or more children).
Usually, if one spouse did not have earned income (work/business), a married couple was ineligible for the credit. However, a credit could still be claimed if one spouse was a full-time student or was disabled, in which case the student/disabled spouse was considered to have earnings of $250 a month for one child or $500 per month for two or more children.
Under ARPA, the childcare credit for most taxpayers was enhanced by the following changes:
- The credit is fully refundable so you can benefit even if you have no 2021 tax liability.
- The maximum credit percentage increased from 35 percent to 50 percent, while the limit for qualified expenses increased to $8,000 for one child and $16,000 for two or more children. As a result, the maximum credit increased to $4,000 for one child or $8,000 for two or more children.
- The credit percentage is gradually reduced for adjusted gross income (AGI) exceeding $125,000 until it reaches 20 percent for AGI above $183,000. In that situation, the maximum credit is $1,600 for one child or $3,200 for two or more children. If AGI exceeds $400,000, the credit is reduced more, and it is eliminated for AGI above $438,000.
To qualify for these credits, you must provide the amount of related expenses paid by child and by provider, including each provider’s complete name, address and tax ID#.
Daycare spending accounts at work can enhance tax benefits even further. Please contact us if you have any questions on these expanded childcare tax credits.