NTA Blog: Changes to the Child and Dependent Care Credit for the 2021 tax year provide additional relief for taxpayers who work and care for children and other dependents

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If you paid a child care center, eligible parent or other eligible caregiver to care for your child or another eligible person so that you and/or your spouse could work or seek work, you may be entitled to Credit for child care and dependent care on your 2021 tax return.

With so much publicity about changes to child tax credit advance payments for the 2021 tax year, many taxpayers may have overlooked the changes to another important credit – the child care credit. children and dependents. In 2021, the US Bailout Act of 2021 (ARPA), temporarily increased the benefit of the Child and Dependent Care Credit to provide additional assistance to working caregivers during the COVID-19 pandemic. Previously, taxpayers could claim the child and dependent care credit for between 20% and 35% of eligible expenses, up to $3,000 for one eligible person or $6,000 for two or more eligible people. . The previous version of the credit was non-refundable. A non-refundable tax credit is a type of tax relief that reduces one’s taxable income dollar for dollar and can only reduce taxable income to zero and will not generate a tax refund in the event that the potential credit exceeds the taxable income. While refundable tax credits, even if you owe no tax, will result in a tax refund and be paid to you.

For 2021 only, ARPA has increased the limit of expenses that can be claimed to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals. The maximum credit amount has been increased to 50%. For the first time, in 2021, the credit became potentially refundable. This means a maximum credit of $4,000 for one eligible person receiving care and $8,000 for two or more people. In 2021, taxpayers with adjusted gross incomes (AGI) up to $125,000 are eligible for the full credit, after which the percentage of expenses taxpayers can claim gradually decreases until it reaches $438,000. in AGI.

How does credit work?

For 2021, the child care and dependent care expense credit is a refundable credit for taxpayers and their spouses (if married filing jointly), with a primary place of residence in the United States for more than half of 2021. A refundable tax credit directly reduces tax dollar-for-dollar and results in a refund when the amount of the credit exceeds the taxpayer’s tax payable. Taxpayers who pay for the care of an eligible person such as a child, elderly parent or disabled family member so that they can work or seek work may qualify for this significant tax relief. The credit is designed specifically for workers to help offset the costs associated with providing care. For example, a single parent with one child paying $8,000 in child care costs can save up to $4,000 on an adjusted gross income of $50,000, while a married couple with 2 children paying $12,000 $ in childcare costs can save up to $6,000 on an adjusted gross income of $50,000. income of $125,000 or less.

What is a “qualified” person?

For the purposes of the child and dependent care credit, an eligible person is:

• An eligible dependent child who was under the age of 13 when the care was provided,
• A spouse who was physically or mentally unable to care for themselves and lived with the taxpayer for more than half the year, or
• A person who was physically or mentally incapable of caring for himself, living with the taxpayer for more than half the year, and either: (a) was the taxpayer’s dependant; or (b) could have been the taxpayer’s dependent, except that he received a gross income of $4,300 or more, or filed a joint return, or the taxpayer (or spouse, s filing a joint return) could have been claimed as a dependent on another taxpayer’s return. (An individual is physically or mentally unable to care for oneself if, due to physical or mental disability, the person is unable to provide for his or her hygienic or nutritional needs or requires the full-time attention of another person for his or her own safety or that of others. )

What are the requirements for the Child and Dependent Care Credit?

• The taxpayer (and spouse, if married) must have “earned income”. Special earned income rules apply to taxpayers and their spouses who are disabled or full-time students.
• Payments for care must be made so that taxpayers can work or seek work.
• If the taxpayers are married, they must file a joint return, unless they benefit from the limited exception for married taxpayers living separately from their spouse. (There are special rules if the taxpayers are divorced or separated. A non-custodial parent claiming a child as a dependent should review the rules accordingly. post 503, Child and dependent care expenses.)
• Taxpayers must generally identify all persons or organizations caring for the child or dependent, including name, address, and tax identification number (either Social Security number or employer identification number) of the healthcare provider on the declaration.

Who claims the credit?

In tax year 2020, nearly 5 million taxpayers claimed the child and dependent care credit, of which more than 1 million also claimed the income tax credit won (EITC). Taxpayers claiming both the Child and Dependent Care Credit and the EITC received an average of $984 for the Child and Dependent Care Credit in the tax year. In addition, nearly 10,000 taxpayers claimed both the Child and Dependent Care Credit and the EITC based on the need for an eligible disabled child.

How to claim the credit?

Taxpayers eligible for the credit must complete Form 2441, Child and dependent care expenses and attach it to their Form 1040, U.S. personal income tax filing, Form 1040-SR, U.S. Income Tax Return for Seniors or Form 1040-NR, Tax filing for non-resident aliens in the United States. If they received dependent benefits from an employer (an amount is shown in box 10 on their Form W-2, Salary and tax declaration), they must complete Part III of Form 2441.

Taxpayers who are unsure of their eligibility for the child care and dependent care credit can use the Interactive Child and Dependent Care Credit Eligibility Wizard on IRS.gov to determine eligibility. Taxpayers must also determine if they qualify for the EITC for a child of any age if the person has a total and permanent disability. Taxpayers needing help with EITC eligibility can use the IRS EITC Wizard to determine if they qualify for this credit.

Conclusion:

ARPA provided expanded tax relief for millions of taxpayers who may face financial hardship due to the COVID-19 pandemic. The changes to the child and dependent care credit alone mean that more taxpayers are eligible for the credit for the first time, and for many the amount of the credit will be higher than in previous years. TAS estimates that most taxpayers will see an average increase of 136% in this credit, with the credit increasing from an average of $652 for the 2020 tax year to an average of $1,537 for the tax year. 2021. When filing tax returns for the 2021 tax year, taxpayers should take advantage of this and other available tax relief provisions.

The IRS Volunteer Tax Assistance and Senior Tax Counseling Programs offer free basic tax preparation to qualified individuals and can help ensure that taxpayers receive all the credits to which they are entitled.