Easy methods to reap the benefits of the expanded tax credit score for baby care prices
FatCamera | E+ | Getty Images
Last year’s childcare expenses may be worth more than you think at tax time.
The child and care allowance, as it’s known, has been expanded in a number of ways for 2021, among other tax changes. This means many families could get a bigger tax break and the loan could reach a wider range of households than before.
“Even though you may not have qualified for it in the past, you can now,” said Henry Grzes, senior manager of tax practices and ethics at the American Institute of CPAs.
More from Smart Tax Planning:
Here’s a look at more tax planning news.
According to research by ValuePenguin, the average national cost of one toddler in full-time childcare is $9,991 annually. Generally, childcare costs decrease as the child gets older, although they can still be thousands of dollars a year depending on where you live and the type of childcare.
The child and dependents tax credit – which differs from the more well-known child tax credit – generally offers parents some support in covering the cost of caring for children under 13 or adult dependents. The expanded version, enacted under the American Rescue Plan Act last March, applies only to 2021 and returns to previous rules this year.
However, the general qualifications did not change. That means the loan is only given for dependent care so you can go to work or look for work (or perhaps attend school). Generally, 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 eligible expense cap is $8,000 for one child ($3,000 or more) or $16,000 ($6,000 or more) for two or more children. In addition, depending on your income, you may be able to write off up to 50% (previously 35%) of these expenses (details below). This means you may receive a maximum credit of $4,000 for one child and $8,000 for two or more children (up from $1,050 and $2,100 respectively).
And importantly, the 2021 credit is refundable – meaning you could still get the credit in the form of a refund even if you don’t have a tax liability.
Note that if you have a Flexible Dependent Care Expense Account, the childcare expenses you cover through this FSA are not eligible for tax credit. The money in this account will be credited pre-tax – meaning you’re already getting 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 where you may be able to claim both an FSA and the tax credit, Alison said. Generally, if your qualifying expenses exceed your FSA reimbursements, the difference can be accounted for in 2021 if the total does not exceed $8,000 (one child) or $16,000 (two).
For example, if you used $5,000 in FSA dollars but spent $12,000 caring for your one child, you can get $3,000 – the difference between $5,000 and $8,000 – of the Use excess for tax credit.
Meanwhile, the 50 percent share of 2021 spending is for taxpayers with incomes of $125,000 or less. So in the example above, you get 50% of $3,000 or $1,500 in credit.
Above this income threshold, the credit begins to taper off until it reaches 20% on income between $183,000 and $400,000 and disappears entirely on income above $438,000.
Prior to the 2021 change, the 35% maximum began to decline at income above $15,000, until it reached 20% at around $45,000.