There are improvements made by the American Rescue Plan Act (ARPA) to the child and dependent care tax credit for the 2021 tax year. The credit covers eligible expenses that you pay to care for one or more qualifying individuals so you can work, or if you’re married, so both you and your spouse can work.
What Expenses Qualify?
For a care expense to qualify for the credit, the expense must be “employment-related,” i.e., it must enable you and your spouse to work (or look for work), and it must be for the care of your child, stepchild, or foster child, or your brother or sister or step-sibling (or a descendant of any of these), who’s under 13, lives in your home for over half the year, and doesn’t provide over half of his or her own support for the year. The expense can also be for the care of your spouse or dependent of any age who’s physically or mentally incapable of self-care and lives with you for over half the year.
The typical expenses that qualify for the credit are payments to a day care center, nanny, or nursery school.
The cost of household services, e.g., domestic help, qualify as long as the cost at least in part goes towards the care of the individual. Expenses can include cooking, light housework related to the qualifying individual’s care, and the care itself.
Expenses provided for care outside the home also qualify. This applies if the person regularly spends at least eight hours each day in your home. If the qualifying person receives care in a dependent-care center, the center must comply with all relevant state and local laws. A dependent-care center is one that cares for more than six people for a fee.
What Doesn’t Qualify?
- Transportation costs to/from a childcare facility
- Overnight camp expenses
- Expenses for education of a child in kindergarten or higher
The cost of before- and after-school programs may qualify as care expenses if the program is for the care of the child. Education costs below kindergarten qualify if you can’t separate those costs from the cost of care – this includes nursery school.
How to Claim the Credit
To claim the credit, married couples must file a joint return. For purposes of this rule, a valid same-sex marriage that’s authorized under state or foreign law is recognized, but a registered domestic partnership or a civil union isn’t.
The 2021 credit is refundable as long as either you or your spouse has a principal place of abode in the U.S. for more than one-half of the tax year.
Further, you must provide the caregiver’s name, address, and social security number (or tax ID number if it’s a day care center or nursery school). A day care center must be in compliance with state and local regulations.
You also must include on the return the social security number of the children who receive the care.
Limits on Calculating the Credit
When calculating the credit, several limits apply:
First, qualifying expenses are limited to the income you or your spouse earns from work, self-employment, or certain disability and retirement benefits—using the figure for whichever of you earns less. Under this limitation, if one of you has no earned income, you won’t be entitled to any credit. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, the spouse is considered to have monthly income of $250 (if the couple has one qualifying individual) or $500 (two or more qualifying individuals).
For 2021, the first $8,000 (increased from $3000) if you have one qualifying individual, or $16,000 (up from $6000) if you have two or more qualifying individuals, of care expenses generally qualifies for the credit. However, if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the qualifying expense limits ($8,000 or $16,000) are reduced by the excludable amounts you receive.
If you have questions about how this credit might benefit you and your family, or you would like to discuss the subject further, please contact our team of tax specialists at EagleStone.
