Dependent Care Credit for 2021:
 This credit used to be a non-refundable credit, meaning it could only offset(pay) part or all of your income tax-liability--depending on the amount of your daycare expenses and income. Unfortunately, if you had no income tax liability, then you could not use the credit. I stress the words income tax liability here because if the client had self-employment taxes, the credit could not be used to pay them.
                Now, with the changes made, beginning in Tax Year 2021, the Dependent Care Credit can now be a refundable credit, that means you can get part, or all, of the credit refunded to you. And, the credit amount has increased—drastically.

• The maximum amount of work-related expenses that can be claimed has also increased drastically from $3,000 for one qualifying dependent to $8,000.  And for families with more than one qualifying dependent, it has increased from $6,000 to $16,000.
• The credit amount has also increased from 35% to up to 50% of qualified expenses paid--the family’s percentage rate depends on amount of your Adjusted Gross Income(AGI).*
• Information from the provider showing their name, address, tax ID number, and actual expenses paid for each dependent in 2021 is needed to claim this credit.
• Taxpayers are also generally required to have earnings; the amount of qualifying work-related expenses claimed cannot exceed the taxpayer's earnings 

*As before, the more a taxpayer earns, the lower the percentage of employment-related expenses that are considered in determining the credit. However, under the new law, more individuals will qualify for the new maximum 50% of employment-related expenses credit percentage rate. That's because the adjusted gross income level at which the credit percentage starts to phase out is raised to $125,000.  Above $125,000, the 50% credit percentage goes down as income rises. It is entirely unavailable for any taxpayer with adjusted gross income over $438,000.

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More information on 2021 Dependent Care Credit can be found at IRS.gov at:
www.irs.gov/newsroom/child-and-dependent-care-tax-credit-faqs (For up-to-date information please check this link)
https://www.irs.gov/newsroom/new-faqs-available-to-aid-families-and-small-business-under-the-american-rescue-plan
General Information (for 2020 taxes not yet updated for 2021 changes) www.irs.gov/publications/p503 ​

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As of now, these changes to the Dependent Care Credit are for 2021 tax year only. They do not apply to future years.

General Requirements: (accessed from IRS 6/17/2021)

• A qualifying person generally is a dependent under the age of 13, or a dependent of any age or spouse who is incapable of self-care and who lives with the taxpayer for more than half of the year.
• To be eligible for the refundable credit, a taxpayer (or the taxpayer's spouse if filing a joint return) must reside in the United States for more than half of the year. However, special rules apply to military personnel stationed outside of the United States.
• Earned Income Limitation: The amount of work-related expenses that can be taken into account in calculating the credit cannot exceed your earned income. If you are married and filing a joint return, the work-related expenses you can take into account are limited to the lesser of your or your spouse’s earned income.  ​
• A work-related expense is an amount you (or your spouse in the case of a joint return) pay for the care of a qualifying person, or for household services if at least part of the services is for the care of a qualifying person, in order for you to work or look for work.  Your work can be for others or in your own business or partnership.  It can be full or part-time.  It also includes actively looking for work.  However, if you don’t find a job and have no earned income for the year, you can’t take this credit. 
• There are special earned income rules for students and those mentally or physically incapable of caring for themselves.  If you (or your spouse in the case of a joint return) are a full-time student or are mentally or physically incapable of caring for yourself, you will be treated as having earned income of $250 if you have one qualifying person (or $500 for two or more qualifying persons) for any month you are a full-time student or not able to care for yourself. ​
  • Important: If in the same month you and your spouse both did not work and were either full-time students or not physically or mentally capable of caring for yourselves, only one of you can be treated as having earned income in that month.  (VITA TAX PREPARERS: This is where page 2 of the 2441-Dependent Care Credit Form Screen needs to be completed)
• ​You must identify all persons or organizations that provided care for your child, dependent, or spouse.  To identify the care provider, you must give the provider’s name, address, and taxpayer identification number (TIN).  You can print Form W-10, Dependent Care Provider’s Identification and Certification, and give it to your care provider to request this information.
  
  

American Rescue Act

child tax Credit

Impact on Families