Possibly you and your spouse filed jointly claiming your child for a child care credit on your 2020 tax return so you could work or find work. In order to do so, your child must have been under the age of 13 when care was being provided.
In 2021, for people living in the U.S for more than half the year, the credit is refundable. With a $500 tax liability and $600 credit you can get $100 back as a refund on your tax return in 2021. The extra credit will not be wasted. This is great for lower-income people because they are more than likely to lose all or a part of the credit’s value when it’s non-refundable.
There are other changes in the tax law to increase the potential percentage for 2021. The maximum percentage for 2021, has been pushed up from 35 to 50%. Other expenses are also subject to credit. The American Rescue Plan Act will allow a credit of up to $8,000 in expenses for one child and $16,000 for several children vs the $3,000 in expenses for one child and $6,000 for 2 children or more. When added to the 50% maximum credit percentage, it allows for the highest credit amount available for this year at $4,000 in expenses for one child and $8,000 for more children.
The phase-out framework has also changed so more families will get the maximum credit amount. Instead of the credit percentage starting to decline when Adjusted Gross Income exceeds $15,000, it will not reduce until the AGI reaches $125,000. Therefore, all eligible families with an Adjusted Gross Income of $125,000 or less will get a credit worth 50% of their eligible expenses. The percentage will drop from 50% to 20% for those with an AGI between $125,001 and $183,001. It will remain at 20% for families with an AGI from $183,001 to $400,000. Afterward, it will gradually drop from 20% to 0% for taxpayers with an AGI over $400,000. If your AGI is over 438,000 you will not get the credit.
The child and dependent care credit is not just for children. It also covers expenses caring for other people as well. On top of these changes, the credit is available for the care of:
If a wife or husband is physically or mentally incapable of caring for themselves and has lived with you for over half of the year or,
You have someone living with you who is physically or mentally incapable of taking care of themselves and has been with you for more than half of the year;
- was a dependent
- could have been your dependent except he or she received a gross income of $4,300 or more. He or she filed a joint return or you and/or your spouse filed jointly, could have been claimed as a dependent on another person’s tax return.