For 2021 Congress made a big change to the Child Care and Dependent Credit, which helps families cover child care costs -usually a little, but now maybe a lot more.
The child care credit typically applies for a child under 13 or a disabled dependent. Also, the taxpayer (and spouse, if filing Married Filing Jointly(MFJ) have to be working or looking for work, attending school, or disabled, when the expenses were incurred.
Let’s take a look at how it has changed.
- Qualified expenses: In tax year 2020, the amount of qualified expenses that could be used to calculate the credit was up to $3000 for one qualified child/dependent, or up to $6000 for multiple children/dependents. For 2021, this increases to $8000 for one and $16,000 for multiple dependents.
- Credit Amount: In tax year 2020, the amount of qualified expenses that become the credit amount varies between 35% and 20% depending on adjusted gross income (AGI) and there is no phase out based on income. For 2021, the amount of the credit varies from 50% to 0% of the qualified expenses. For most people the percentage will be the same or higher. But at $400,000 AGI (MFJ) or $200,000 AGI (other filing statuses) the percentage starts to drop below 20% and eventually reaches zero as income goes up.
- Refundable Status: In tax year 2020, this credit is non-refundable. For 2021, this credit is refundable. This means that if your tax liability drops to zero for the year and you still have excess credit, you will receive the excess credit with your tax refund.
If this credit reduces your tax liability, you may want to consider adjusting your withholding, so you have less withholding and more in your paycheck each month for the remainder of this year.
But don’t forget to check again next year, as this expansion of the credit is currently only for 2021.
If you need help determining the best withholding for you, we can help so Contact Us.