New Tax Year 2021 Changes Brought About By the American Rescue Plan

The American Rescue Plan provides some great benefits for working parents with young children:

• The child care credit has been expanded. The new law increases the amount of the credit, as well as the percentage of employment-related expenses for qualifying care considered in calculating the credit; modifies the phase-out of the credit for higher earners ($125,000 or above), and makes it refundable even for eligible taxpayers who owe no federal tax.
  • For 2021, eligible taxpayers can claim qualifying employment-related expenses up to:
    • $8,000 for one qualifying individual (up from $3,000 in prior years) or
    • $16,000 for two or more qualifying individuals (up from $6,000).
• The Flexible Spending Account (FSA) contribution amount for dependent care has increased.
  • For 2021, employees are now about to set aside $10,500 in a dependent care flexible spending  account,  instead of the previous $5,000.
  • If you pay for childcare with flexible spending dollars, see your employer to set up an increased payroll deduction.

If you’d like additional information, please see this IRS Bulletin.