With the expansion of the Child and Dependent Care Credit for 2021, Jeff explains what expenses count for this credit, who is eligible, and how this credit is calculated.

As we continue to talk about changes in tax law, today I want to focus on the Child and Dependent Care credit that has been expanded for 2021.

Who is eligible to take the credit?

  • Child care expenses for a qualified individual
    • Dependent under the age of 13
    • A spouse who cannot take care of themselves
    • Other individuals with disabilities
  • Parent/guardian must have earned income and…
    • If married both must have earned income
    • Or incur expenses while looking for work

What expenses count?

  • Childcare provided by a babysitter or licensed dependent care center.
  • Day camp or summer camp fees, even for camps centered around a sport or activity, qualify if the camp was selected to provide care while the parent or parents were at work.
  • Overnight camps do not qualify.
  • Costs related to before- and after-school care for children under 13.
  • Costs related to a nurse, home care provider, or other care provider for a disabled dependent.
  • Expenses related to schooling, tutoring, or overnight camps are not qualifying expenses

How is the credit calculated?

  • Depending on your income, the credit is between 20% to 50% of the first $8,000 to $16,000 of expenses. The $8,000 of expenses can be for one child and the $16,000 of expenses is for those with two or more children.
  • The maximum credit could be as much as $8,000. That would certainly help pay for some of daycare.

You said depending on income?

  • Yes, there are phase-out just like most other tax rules.
  • You will get the full 50% credit if your income is under $15,000.  If your income is between $15k and 125K, your credit will be between 20% and 50%.  If you are over $400,000, then the credit starts to do down from 20% to zero.
  • The phase-outs mentioned are for married filing joint filers.
  • So most people will get a 20% deduction.

Is the credit refundable?

  • It was not in the past, but it is now.

Can employees still use their cafeteria plans to pay for daycare expenses pre-tax like they did in the past?

  • Yes, and that was enhanced also.
  • Before you could exclude up $5,000, but now that limit has increased to $10,500 for single and married individuals.
  • This is still a great option since as we talked about earlier, most people will get a 20% credit based on their income level.
  • But with a cafeteria plan, they can save income taxes, social security and Medicare tax which could be a savings of 30% or more.

Please contact us for further information or ask about the Child and Dependent Care Credit.

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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