If you have a child in daycare you will now be getting a much better credit for the cost of childcare on your 2021 taxes and even better that credit is now a refundable credit, whereas before if you didn’t have enough in taxes to use the credit then you lost it. Making it refundable means more people will be able to use this credit.
- If you have one child, the credit increased from $3,000 to $8,000.
- If you have two or more children, the credit increased from $6,000 to $16,000.
- This credit has always been set as a percentage of the qualifying expenses. Before you could take 35% of your qualified expenses up to the total credit of $3,000, now you can take up to 50% of your qualified expenses up to the total credit of $8,000 (double for more than one child)
- The credit has phase-out limits – if you are a married couple and make between $125K and 183K the credit goes down to 20% then starts phasing out if you make over $400K until you hit $438K where it disappears completely.
For example
| Married filing joint making under $125K | Before | After |
| Qualifying Expenses | $12,000 | $12,000 |
| Amount you can claim | $4,200 | $6,000 |
| Tax liability | $2,000 | $2,000 |
| Total credit | $2,000 | $2,000 |
| Refundable amount | $0 | $4,000 |
| Change in tax | $2,000 | $6,000 |
So, what is a qualified expense – if you pay for daycare for both you and your spouse to work then most of those expenses will qualify. You must receive a document from the provider that has their name, address, phone number, and Federal ID number (either a social security number or an EIN number). This form acknowledges that they received the money and that they will report that as income to the IRS. It can also include after-school programs and summer camps for older children, but it cannot include education expenses for those in Kindergarten or above. If your employer paid for your childcare, you could only take the amount above what they paid for. The limits for tax-free employer-provided dependent care benefits also increased from $5,000 to $10,500 that means if you have an FSA account at work and your employ
er adopts this change you can set this up through your employer. Keep in mind that your employer is not obligated to adopt this change and is not obligated to have a plan that includes this as an employer benefit.
There are several tax changes you should be aware of if you have children that will affect your 2021 taxes. The Child and dependent care credit are only one of them. For information on the Child tax credit and advance payments click here for that blog post.