The American Rescue Plan made changes to the Child and Dependent Care Credit for 2021.
You may be able to claim this credit if you paid expenses for the care of a dependent child under the age of 13, or a dependent of any age or spouse who is incapable of self-care and who lives with the taxpayer for more than half of the year, to enable you (and your spouse, if filing a joint return) to work or actively look for work.
Qualifying expenses include the cost of after-school care and summer day camp. Day camp expenses qualify even if even if the camp specializes in a particular activity, such as computers or soccer. Only day camp expenses qualify for the credit; the cost of an overnight camp does not qualify.
You can claim the credit on expenses incurred up to the child’s 13th birthday. If your son turns 13 on November 18th you can still claim the credit on day camp expenses incurred during the summer or after-school care costs through November 17th.
For 2021, eligible taxpayers can claim the credit on qualifying out of pocket employment-related expenses up to $8,000 for one dependent (up from $3,000 in prior years) or $16,000 for two or more dependents (previously $6,000). Expenses paid by employer-provided benefits, such as those provided through a Dependent Care Flexible Spending Account (FSA), are not eligible for the credi
The maximum credit for 2021 is 50% (previously 20%) of the qualifying expenses - $4,000 for one qualifying individual or $8,000 for two or more qualifying individuals. The percentage is reduced once Adjusted Gross Income exceeds $125,000, regardless of filing status. No credit is allowed for a taxpayer with AGI over $438,000, again regardless of filing status.
The credit is fully refundable for 2021.
The maximum amount an employee can contribute to an employer-sponsored Dependent Care FSA is increased to $10,500 (up from $5,000), but only if the employer plan is revised to allow this increase. Contributions to such a plan are considered “pre-tax” for federal income tax purposes. If you contribute $10,500 to a revised employer plan your federal taxable wages, reported in Box 1 of the Form W-2, will be reduced by $10,500.
Be sure to get the federal Employer Identification Number of the care provider if it is a “for-profit” business. You must report this number on the Form 2441 - the IRS will disallow the credit if you do not provide an ID number. However, according to the IRS, “You do not have to show the taxpayer identification number if the care provider is one of certain tax-exempt organizations (such as a church or school). In this case, enter ‘Tax-Exempt’ in the space where the tax form calls for the number.”