Expanded dependent care credit

Congress is giving billions of dollars more in additional credits in 2021. The expanded credits include dependent care credit, child tax credit, and the health insurance premium tax credit.

The new tax laws for dependent care may be able to save you thousands of dollars in taxes if you are able to claim the credit in 2021.

You may be able to claim the child and dependent care credit if you paid expenses for the care of a qualifying individual to enable you (and your spouse, if filing a joint return) to work or actively look for work. Generally, you may not take this credit if your filing status is married filing separately.

The dependent care credit is for an under-age-13 dependent or for your spouse or dependent who is not able to take care of themself.

The credit has been expanded in several ways.

The maximum amount of eligible expenses has almost tripled as a result of the new change.

The maximum credit rate increased from 35 percent to 50 percent.

In 2020 the maximum rate began to decline when the adjusted gross income (AGI) exceeded $15,000, but for 2021 you are able to take the maximum rate until your AGI reaches $125,000. Previously only the people with a very low income benefited from the maximum rate. With the new tax law, even the middle class will receive the maximum rate.

In 2020 the maximum expenses eligible for the credit were $3,000 for one qualifying individual and $6,000 for more than one qualifying. The credit rate was a maximum of 35 percent up to adjusted gross income AGI of $15,000. The rate decreased by 1 percent for each additional $2,000 of AGI. Once your AGI was $43,000 or higher, you had a 20 percent credit rate.

For 2021 only, the maximum creditable expenses are $8,000 for one qualifying individual and $16,000 for more than one qualifying individual. The rate has been increased to 50 percent for up to an AGI of $125,000. Your credit then decreases by 1 percent for each additional $2,000 of AGI. Once your AGI is $185,000 or higher, you have a 20 percent credit rate.

There is a new upper limit. When your AGI reaches $400,000. You reduce your credit by 1 percent for each additional $2,000 (or fraction thereof) until the rate is 0 at an AGI of $440,000.

Also, for the tax year 2021, the maximum amount of employer-provided dependent care benefit excluded from your taxable income increases from $5,000 to $10,500 (or $5,250 for married filing separate)

Currently, the new dependent care rules are only for the tax year 2021.

David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at david@yourtaxcare.com