For 2021, families with young children can get a bigger tax credit for childcare expenses. More families will qualify for the credit, too. Not only will millions of families get a larger credit when they file their tax return next year, but many more Americans will get the full credit amount for 2021. It will also generate tax refunds for many families, which is something the credit didn’t do before.
2020 Child and Dependent Care Credit Basics
- If you paid someone to care for your child last year so that you (and your spouse, if filing a joint return) could work or look for work.
- The child must have been a dependent who was under age 13 when the care was provided.
- The credit amount was a percentage of certain work-related expenses you paid to a care provider for the care of your child or a disabled person, which ranged from 35% to 20%, depending on your adjusted gross income (AGI).
- Expenses used to calculate the credit were limited to $3k of paid expenses if you had one child/disabled person in your family, or up to $6,000 of paid expenses for two or more; the maximum credit for 2020 was $1,050 if you had one qualifying child/disabled person (35% of $3,000) or $2,100 if you had more than one (35% of $6,000).
- 2020 credit was also non-refundable. That means it couldn’t reduce the tax you owed below zero and, therefore, trigger a refund on its own.
Changes for 2021
- 2021 credit is refundable for people who live in the United States for more than half of the year.
- The maximum percentage for 2021 is bumped up to 50%.
- More paid expenses are used for the credit: up to $8,000 for one child; $16,000 for multiple kids. Combined with the 50% maximum credit percentage, the highest credit amount available for 2021 is $4k for one child, $8k for two or more children.
The phase-out structure is also changed so that many more families will get the maximum credit amount. Instead of the credit percentage starting to decrease when AGI exceeds $15,000, it won’t be reduced until AGI reaches $125,000. So, every eligible family with an AGI of $125,000 or less will get a credit worth 50% of their qualifying expenses. The percentage is gradually reduced from 50% to 20% for people with an AGI between $125,001 and $183,001. It stays at 20% for families with an AGI from $183,001 to $400,000, but then it’s gradually reduced again from 20% to 0% for taxpayers with an AGI above $400,000. If your AGI is above $438,000, you won’t get a credit.
More Than Just Child Care
As the name suggests, the child and dependent care credit isn’t just for childcare. It covers expenses for the care of other people, too. In addition to expenses for the care of a child under the age of 13, the credit is available for expenses to care for:
- a spouse who was physically or mentally incapable of self-care and lived with you for more than half of the year; or
- Someone who was physically or mentally incapable of self-care, lived with you for more than half of the year, and either:
- was your dependent, or
- could have been your dependent except that he or she received gross income of $4,300 or more, he or she filed a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another person’s tax return.
The second category can include elderly parents living with an adult child if the parent is claimed as a dependent on the child’s tax return.
A person who can’t dress, clean, or feed themselves because of physical or mental problems are considered not able to care for themselves. A person who must have constant attention to prevent them from injuring themselves or others is also considered not able to care for themselves.
Additional Rules Apply
There are specific rules governing the type of care provided, what’s considered a work-related expense, identification of the care provider, earned income requirements, and more.
Make sure you take advantage of this valuable credit if you pay to have someone else care for a child or other eligible person. It could save you thousands of dollars when you file your next tax return.
