Often conflated with the child tax credit, the child and dependent care tax credit offers working parents a boost at tax time to help cover the cost of care for children under age 13 or adult dependents.
Previously, families could claim up to $3,000 in expenses per dependent for a maximum of $6,000. However, the American Rescue Plan raised the eligible costs for 2021 to $8,000 per dependent, capped at $16,000.
This year, families may receive up to 50% of those expenses as a refundable credit, depending on income, meaning it may reduce their tax bill or offer a refund, regardless of liability.
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“The changes made by the American Rescue Plan stand to have an enormous impact on families and their childcare expenses,” said Linda Smith, director of the Bipartisan Policy Center’s early childhood initiative.
While many families have received payments for the child tax credit, nearly 50% aren’t aware they can claim another tax break for child and dependent care expenses, according to a Bipartisan Policy Center survey.
Switching the credit from non-refundable to refundable will reach more Americans because “many low-income families just simply don’t have a tax liability,” Smith said.
The expanded benefits may also provide a boost for higher earners, said Sallie Mullins Thompson, certified financial planner and certified public accountant at the firm in her name in New York.
The 50% credit for 2021 begins to phase out when adjusted gross income is above $125,000, and a family won’t be eligible once they exceed $438,000.
Child tax credit is a catalyst for consumer spending
However, there are strict rules to qualify, Mullins Thompson said.
There must be an eligible child or dependent, and families must have earned income, which is wages or payments other than investments. Moreover, the expenses must be “work-related,” allowing both spouses to work outside of the home.
“The childcare provider has got to be an operating functional business,” she added.
The Bipartisan Policy Center has a calculator showing how much families may receive, and taxpayers may learn more about eligibility through the IRS.
The cost of childcare
Before the pandemic, families spent an average of $9,200 to $9,600 per child on childcare, according to nonprofit Child Care Aware. These costs represent about 10% of household income for married couples and 34% for single parents.
However, the exact cost of childcare varies widely by location and the type of services, and many parents struggle to foot the bill.
Some 54% of parents said it’s challenging to find quality childcare within their budget, according to an October 2019 Bipartisan Policy Center survey.
As a result, respondents have reduced spending on non-essential items (75%), everyday purchases (59%) or reduced money saved for emergencies (57%).
“I think one of the things that we learned from the Covid experiences is just what a critical piece of this country’s economic fabric childcare really is,” said Smith. “And without it, families have been struggling.”
President Joe Biden called for making the credit changes permanent in the American Families Plan. While it’s unclear whether Congress will extend the enhanced benefits past 2021, some experts see support on both sides of the aisle.
“I think there’s a fair amount of bipartisan interest,” Smith said. “We’re very hopeful that we will see this get continued as we move forward into the next year.”
