The American Rescue Plan offers some great tax benefits for working parents with young children. Not only has the plan increased the amount of the credit and eligible expenses for child and dependent care, but it also has modified the credit’s phase-out for higher earners and, for the first time, made it fully refundable even if no federal income tax is owed.
For 2021, the top credit percentage of qualifying expenses has increased from 35% to 50%.
In addition, eligible families can claim qualifying child-care and dependent-care expenses of 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 before 2021).
This means that the maximum credit in 2021 of 50% for one dependent’s qualifying expenses is $4,000, or $8,000 for two or more dependents.
When figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account, must be subtracted from total eligible expenses.
As before, the more a taxpayer earns, the lower the credit percentage. But under the new law, more people will qualify for the new maximum 50% credit rate. That’s because the adjusted gross income (AGI) level at which the credit percentage is reduced has been raised substantially from $15,000 to $125,000. Above $125,000, the 50% credit percentage is reduced as income rises, plateauing at a 20% rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20% until reaching $400,000 and is then phased out above that level. It is completely unavailable for any taxpayer with AGI exceeding $438,000.
More details can be found here.
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