The child and dependent care credit has been available to taxpayers for a while but for 2021 tax year, the New American Rescue Plan Act (ARPA) has enhanced this credit. The credit is available for expenses that a taxpayer pays for the care of qualifying children of age 12 and under so the taxpayer can be gainfully employed. The 2021 credit is refundable if either the taxpayer or their spouse has a principal residence in the US for more than half of the year.
The expenses must enable the taxpayer to work and must be for the care of
- A child, stepchild, brother, sister, or step sibling who lives in your home for over half the year and does not provide for their own support.
- Spouse or dependent who is handicapped and lives with the taxpayer for over half the year.
The qualified expenses are payments to a
- Day care center, nanny or nursery school
- Before and after school programs
Please note that expenses for sleep away camps, kindergarten and higher grades do not qualify.
To claim the credit, married couples must file a joint return. The taxpayer also must furnish pertinent information like name, address, and SSN/EIN of the child-care provider along with the name and SSN of the dependent receiving the care.
There are certain limits that apply to this credit
- The qualifying expenses are limited to the taxpayer’s income. If either of the spouses does not have earned income, the credit is zero. Income could be from work, self-employment, certain disability, or retirement benefits.
- If one of the spouses does not have any earned income because of disability or being a full-time student, the deemed earned income is $250 per month per qualifying individual or $500 per month for two or more qualifying individuals.
- For 2021, the qualified expenses are the first $8,000 for one qualifying dependent and $16,000 for two or more qualifying dependents (versus 3,000 and 6,000 respectively earlier). These amounts must be reduced by any benefits received under employer provided dependent care assistance program.
The Credit is worth a maximum of $4,000 for one qualifying dependent and $8,000 for two or more qualifying dependents for taxpayers with AGI of $125,000 or less. The credit gets completely phased out for taxpayers with AGI of more than $440,000.
Please contact us for more information about this credit.