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Child & Dependent Care Changes That May Affect Your 2021 Tax Refund

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The American Rescue Plan has introduced changes to these key 2021 tax credits related to child and dependent care which can be a valuable way to lower your tax obligations.
Child & Dependent Care Credit Increased for 2021 Only
In 2021 the amount of the child credit and eligible expenses for child and dependent care modifies the phase-out of the credit for individuals with a higher income and makes the credit refundable.
This tax year, the top credit percentage of qualifying expenses increases from 35% to 50%. In addition, eligible taxpayers can claim qualifying child and dependent care expenses of up to:
  • $8,000 for one qualifying child or dependent, up from $3,000 in prior years, or
  • $16,000 for two or more qualifying dependents, 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.
However, 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.
Like before, the more a taxpayer earns, the lower the credit percentage. Under the new law, more people will qualify for the new maximum 50% credit rate. This is because the adjusted gross income (AGI) level effecting the credit percentage is raised substantially from $15,000 to $125,000.
For those individuals 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.
In 2021, for the first time, the credit is fully refundable. This means that an eligible family can receive it, even if they owe no federal income tax.
Childless EITC Expanded for 2021
For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC), a fully refundable tax benefit that helps many low- and moderate-income workers and working families. The maximum credit is nearly tripled for these taxpayers and is, for the first time, made available to both younger workers and senior citizens.
In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. The ETIC is available to filers with an AGI below $27,380 in 2021 and can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don’t qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.
Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.
Changes Expanding EITC for 2021 & Future Years
Changes expanding the EITC for 2021 and future years include:
  • Singles and couples who have Social Security numbers can claim the credit, even if their children don’t have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn’t qualify for the credit
  • More workers and working families who also have investment income can get the credit. Starting in 2021, the limit on investment income is increased to $10,000. After 2021, the $10,000 limit is indexed for inflation. The current limit is $3,650.
  • Married but Separated spouses can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for at least six months out of the year and must have a qualifying child living with them for more than half the year.
Expanded Child Tax Credit for 2021 Only
The new law also increases the amount of the Child Tax Credit, and expands it to make it available for 17-year-old dependents, fully refundable and possible for families to receive up to half of it, in advance, during the last half of 2021. Moreover, families can get the credit, even if they have little or no income from a job, business or other source.
Currently, the credit is worth up to $2,000 per eligible child. The new law increases it to as much as $3,000 per child for dependents ages 6 through 17, and $3,600 for dependents ages 5 and under.
The maximum credit is available to taxpayers with a modified AGI of:
  • $75,000 or less for singles,
  • $112,500 or less for heads of household and
  • $150,000 or less for married couples filing a joint return and qualified widows and widowers.
Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every $1,000 in modified AGI.
Also, the credit is fully refundable for 2021. Before this year, the refundable portion was limited to $1,400 per child.
Advance Child Tax Credit Payments
From July through December 2021, up to half the credit will be advanced to eligible families by Treasury and the IRS. The advance payments will be estimated from 2020 tax returns, or if not available, 2019 tax returns.
As you can see, there are many new opportunities available to be eligible for tax credits related to your income and household demographics. Be sure to consult your tax professional for details about how they may affect you.

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Jonathan Medows, CPA

Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.

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