Welcome to WCS Money Tutorials.
Today’s topic is the 2021 Child and Dependent Care Credit.
This credit could be worth up to $8000 and, under certain circumstances, the qualified
expenses that determine the credit can be paid to family members.
I want to point out that the child and dependent care credit is not the child tax credit.
It is an additional credit to help working parents pay for childcare.
However, most people eligible for the child and dependent care credit will also be able
to claim the child tax credit.
The major changes to the child and dependent care credit that apply only to the 2021 tax
year include an increase in the credit rate percentage from 35% to 50%, which increases
the maximum credit to $4,000 for 1 qualifying dependent and $8,000 for 2 or more dependents.
Taxpayers with incomes of up to $125,000 qualify for the maximum 50% rate.
But the biggest change for this year only is that the credit is fully refundable, which
means many lower income taxpayers will benefit from this credit, where under the previous
law, they got little or no benefit because they had little or no tax liability.
There are also temporary rules for flexible spending arrangements.
Unused amounts from 2020 can be added to the maximum amount of dependent care benefits
allowable for 2021.
Unused amounts may also be used in subsequent years if your employer’s plan allows it.
You may also receive credit for 2020 expenses if they were paid in 2021.
For tax years after 2021, this credit will revert to previous law, making it less generous,
nonrefundable, but without an income limit.
Because the credit becomes nonrefundable, it will be limited by your tax liability,
which means lower income people will not be able to take the full credit, if they even
qualify for it at all!
For instance, most people with children will be able to claim as head of household or married
filing jointly, so if their AGI was less than $17,000, they would not be able to claim this
credit at all, even though they would qualify for the highest credit percentage, because
their standard deduction would be greater then their AGI, which means they would have
no tax liability just based on their standard deduction.
Furthermore, the AGI on which the credit percentage is based is not adjusted for inflation, which
means that more lower income Americans will not benefit from this credit at all.
Precisely the Americans who need this credit the most!
This is the 2021 phaseout schedule showing the credit percentages for incomes up to $125,000,
which is just 50%, then phasing down 1% for each $2000 of income over $125,000, up to
$438,000, where the credit phases out completely.
The credit is calculated simply by multiplying the credit base, which are your qualifying
expenses of up to a maximum of $8,000 for 1 dependent or $16,000 for 2 or more dependents,
by the credit percentage, which is 50% for incomes up to $125,000.
However, as I will explain later, this credit may be further limited by your earned income.
This credit
was designed to allow people with dependents to work, so naturally, this credit has the
following requirements.
You and your spouse (unless disabled or a full-time student) had earned income, income
earned from work or self-employment, during the year.
You paid the expenses so you could work or look for work.
Your credit is limited by the earnings from work.
If you are married, then the credit is limited by the earned income of the lowest earning
spouse.
So if you have qualifying expenses of $16,000, but the earned income of the lower earning
spouse is $10,000, then the credit base is $10,000, which yields a credit of $5,000,
assuming you qualify for the 50% credit percentage rate.
The main thing to note here about filing status is that if you are married, then you must
file jointly.
However, you can be considered unmarried if you filed a separate return, your spouse did
not live in your home for the last 6 months of the year, you provided the home for the
qualifying person for more than half the year and paid more than half the cost of keeping
up the home.
The main requirement for a person to be qualified for childcare expenses for this credit is
that they be younger than age 13 when the care was provided.
However, there is no age limit for a spouse or dependent who is physically or mentally
unable to care for themselves.
As I explained at the start of this video, you may make payments to relatives, but to
qualify for the credit, they cannot be anyone that you or your spouse could claim as a dependent
or any of your children younger than age 19 by the end of the year or to someone who was
your spouse at any time during the tax year.
Moreover, care expenses that were reimbursed, deducted, or excluded do not qualify for this
credit.
Naturally, to qualify for this credit, you must provide information about the provider,
including name, address, and their taxpayer identification number, which is usually their
Social Security number.
If they refuse to give you this information, then report what you can on Form 2441, then
attach a statement with your name and Social Security number, explaining that your request
for the information was refused.
The easiest way to get this information is to have your provider fill out Form W-10,
which you should keep for your records.
Although I have covered most of the main points about the child and dependent care credit,
there are many details that I could not cover in this short video.
You can find additional information in IRS Publication 503, Child and Dependent Care
Expenses and in the Instructions for Form 2441.
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