Along with the expansion of the Child Tax Credit we flagged last week, the American Rescue Plan is also massively expanding the Child and Dependent Care Credit for 2021. The IRS has released a fairly comprehensive FAQ, but the long and short of it is that if you pay for childcare in 2021, you’re going to be entitled to claim a hefty refund: a median income household with two kids under 13 will receive up to $8,000 back in the cost of paying any childcare provider while working or looking for work. Compare this with the previous structure, where they’d have qualified for a maximum of $1,200, and the benefit is obvious.
The finer details: Any household making less than $125,000 per year will receive up to $4,000 for one child under 13, and $8,000 for two or more when they file for 2021. The amount you receive back will be 50% of the amount you spend on qualified expenses - so if you spend $10,000 on daycare, you’ll get $5,000 back on your 2021 tax return. This benefit applies only to taxpayers who are working or looking for work (both parents must be working if a couple is married), and is intended specifically to defray the costs of child care, whereas the Child Tax Credit (which we told you about in last week’s email) is simply free money for those who have children.
Taxpayers must have earned income to qualify, and must provide documentation (including a TIN or EIN) from their childcare providers, so your qualified expenses must be with licensed providers. These expenses are a bit more expansive than just daycare, however - think after school care programs, summer day camps, etc.
Another important change, and one of the drivers for notifying our business clients about this credit: the Child and Dependent Care Credit is fully refundable for the first time, meaning the full value of the credit is available to low-income working families, regardless of how much they’re paying in 2021 taxes. Once again, this makes it important to spread the word.
As of now the expanded parameters only apply to the 2021 tax year, but making many of these changes permanent is a priority of the current administration, so expect to hear a lot more about these programs as the year rolls on. For more info you can read the IRS’s full guidance, and stay tuned to our blog for more news as it happens.