Last year’s child-care expenses may be worth more at tax time than you realize.
The child and dependent care tax credit, as it’s called, was expanded in several ways for 2021 alongside other tax changes. This means many families will get a bigger tax break and the credit could reach a larger swath of households than it had before.
“Even if you may not have qualified for it in the past, you may now,” said Henry Grzes, lead manager for tax practice and ethics with the American Institute of CPAs.
The average national cost for an infant in full-time child care is $9,991 annually, according to ValuePenguin research. Generally, the cost of care goes down as the child gets older, although it can still easily run into the thousands of dollars per year depending on where you live and the specific type of care.
The child and dependent care tax credit — which is different from the more familiar child tax credit — generally gives parents some help covering the cost of care for children under age 13 or adult dependents. The expanded version, which was enacted as part of the American Rescue Plan Act last March, is for 2021 only and reverts to the previous rules this year.
The general qualifications didn’t change, however. That is, the credit is only available for dependent care provided so that you could go to work or look for work (or, perhaps, attend school). Generally speaking, you (and your spouse, for joint tax returns) must have earned income during the year to claim the credit.
For your 2021 tax return, the cap on the expenses eligible for the credit is $8,000 for one child (up from $3,000) or $16,000 (up from $6,000) for two or more. Additionally, you may be able to write off up to 50% (up from 35%) of those expenses, depending on your income (details farther down). This means you potentially could get a maximum credit of $4,000 for one child and $8,000 for two or more (up from $1,050 and $2,100, respectively).
And, importantly, the 2021 credit is refundable — which means that even if you have no tax liability, you could get the credit in the form of a refund.
Be aware that if you have a dependent care flexible spending account, the child-care expenses you cover through that FSA cannot count toward the tax credit. The money in that account is made pre-tax — meaning you already get a tax benefit.
“You can’t double dip,” said Dave Alison, president and founding partner of Prosperity Capital Advisors in Cleveland.
However, there are instances when you may be able to take advantage of both an FSA and the tax credit, Alison said. Generally, for 2021, if your qualified expenses exceeded your FSA reimbursements, the difference could qualify if the total doesn’t exceed $8,000 (one child) or $16,000 (two).
For example: If you used $5,000 in FSA dollars yet spent $12,000 in care for your one child, you could use $3,000 — the difference between $5,000 and $8,000 — of the excess toward the tax credit.
Meanwhile, the 50% share of expenses for 2021 is for taxpayers with income of $125,000 or lower. So in the above example, you’d get 50% of $3,000, or $1,500, as a credit.
Above that income threshold, the credit begins to phase out, until reaching 20% for income of $183,000 to $400,000 and completely disappearing at income above $438,000.
Before the 2021 change, the maximum of 35% started going lower at income above $15,000 until reaching 20% at about $45,000.