Key tax provisions in the American Rescue Plan Act of 2021 could affect your tax situation. Here’s what you need to know:
Child and Dependent Care Credit Increased for 2021 Only
The new tax law affected taxpayers in several ways. First, it increased the dollar amount of the credit and the number of eligible expenses for the child and dependent care. It also modified the phase-out amount for the credit to allow higher earners to take advantage of the credit. Finally, the new law made the child and dependent care credit fully refundable.
By 2021, the top credit percentage of qualifying expenses increased from 35% to 50%. In addition, eligible families can claim qualifying child 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 (FSA), must be subtracted from total eligible expenses.
As before, the more a taxpayer earns, the lower the credit percentage. Under the new law, however, more people will qualify for the new maximum 50% credit rate because the adjusted gross income (AGI) level at which the credit percentage is reduced is raised substantially from $15,000 to $125,000.
For adjusted gross incomes above $125,000, the 50% credit percentage is reduced as income rises and plateaus at a 20 percent rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20 percent until reaching $400,000 and is then phased out above that level. It is completely unavailable for any taxpayer with AGI exceeding $438,000.
Also of significance is that in 2021, for the first time, the credit is fully refundable. As such, an eligible family can get it, even if they owe no federal income tax.