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American Rescue Plan Increases Tax Credits for Child and Dependent Care

April 26, 2021

The American Rescue Plan introduces many tax changes to individuals and businesses. Find out if you qualify for the increased child and dependent care tax credit.

The American Rescue Plan has expanded child and dependent care benefits for 2021. Let’s see what’s changed.

What is the child and dependent care tax credit?

The child and dependent care credit is available if you paid expenses for the care of a qualifying individual in order for you to be able to work. The credit amount is determined by multiplying qualifying expenses, up to a certain limit, by a percentage that depends on your adjusted gross income. For 2020, the percentage ranges from 35% down to 20% of qualifying expenses.

In order to qualify for the credit, you need to meet some conditions:

  • Your expenses must be directed to the care of one or more qualifying dependent which is:
    • A child under age 13
    • A spouse who is physically or mentally incapable of self-care and lived with you for more than half of the year
    • Someone who lived with you for more than half the year who is physically or mentally incapable of self-care and is either: (a) your dependent; or (b) could have been your dependent but he/she is over the gross income limit or files a joint return
  • The care must be held at home, at a camp, or a daycare facility.
  • Your childcare/camp costs must be work related, meaning that you are forced to pay for the care in order to work. Note - overnight camps do not qualify.
  • You need to have proof of earned income (wages, tips, salaries)
  • When you claim the credit on your tax return, you have to know the name, address, and Social Security number/ employee identification number of the care provider so be sure to keep records and receipts.
  • You must complete IRS form 2441, Child and Dependent Care Expenses as well as either Form 1040 or 1040A.

What did the American Rescue Plan change?

Prior to 2021, qualifying expenses were limited to $3,000 for one qualifying individual ($6,000 for two or more). The maximum credit percentage was 35% of qualifying expenses. For 2021 only, families will be eligible for a refundable tax credit of up to 50% of qualifying expenses on up to $8,000 of expenses for one child and up to $16,000 for two or more. The maximum credit will be up to $4,000 for one qualifying individual ($8,000 for two or more qualifying individuals). Also, instead of the credit percentage starting to decrease when AGI reaches $15,000, in 2021, that changes to AGI of $125,000, ensuring many more families will receive a greater benefit in 2021 than it did prior to 2021.

Want to know if you qualify? Reach out to us, we can help.

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