If you spent money on child care in 2021, you could receive a substantial tax credit this season for the expense. Tax laws constantly change from year to year based on current legislation, so it pays for taxpayers to stay up to date. According to the IRS, the “child and dependent care tax credit” expanded in several ways last year. Therefore, the credit should reach more people than ever before, and provide a bigger tax break than ever before.
Henry Grzes, lead manager for tax practice and ethics with the American Institute of CPAs, said any taxpayer who paid for child care should at least check to see if they qualify, even if they didn’t in the past.
Currently, the national average for full-time infant child care is just under $10,000 annually. Typically, child care costs decrease as the child grows older, though certain situations or certain cities sometimes negate that maxim.
The child and dependent care tax credit is different than the more traditional child tax credit, which gives a tax break for any children in any situation. The dependent care credit affects families with children under 13 or with dependent adults, specifically with the cost of care.
The expanded version, which was enacted as part of the American Rescue Plan Act almost a year ago, only applies to last year’s taxes and reverts to the previous rules for this current year. 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. This means that the cap figure will reflect the entire year’s grand total for many parents.
This year’s child care tax credit expands the percentage allowed to 50 percent
More notably, however, you may be able to write off as much as 50 percent (up from 35 percent) of those expenses, depending on your income. This means you potentially could get a maximum write-off of $4,000 for one child and $8,000 for two or more (up from $1,050 and $2,100, respectively). That’s four times the amount of rebate as in previous years.
Even better, the rebate is fully refundable. This means that parents with no tax liability will receive the money directly as a refund. The main stipulation is that the money spent on child care must not have originated from a flexible, tax-free spending account. In other words, the IRS won’t rebate you twice.
“You can’t double-dip,” said Dave Alison, president and founding partner of Prosperity Capital Advisors in Cleveland. But according to Alison, you can claim the refund up to the amount of your FSA reimbursements.
For example: If you used $5,000 in tax-free FSA dollars on child care, yet spent $12,000 total on care for your one child, you could use $3,000 — the difference between $5,000 and $8,000 (50 percent, remember) — of the excess toward the tax credit.
As always, be sure to consult a qualified tax professional about regarding all of your deductions.