TAX PROVISION

Child and Dependent Care Credit

Using Tax Policy to Stimulate the Economy | March 2021

In addition to changes in the child tax credit, modifications were made to the credit for the costs of third-party child and dependent care. These changes are effective for 2021 only.

The credit was increased to 50% of up to $8,000 of childcare costs for a child under 13 and up to $16,000 of childcare costs for two or more children. This is a significant increase in both the percentage and the ceiling on allowable costs. The credit can also apply to a spouse or other dependent without age limitations if the individual is physically or mentally incapable of caring for themselves.

To qualify for the credit, the taxpayer must have earned income of at least $2,500. In addition, the amount of qualified expenses begins to be reduced with AGI of $200,000 for single taxpayers and $400,000 for married filing jointly.

The ARPA also makes the 2021 credit refundable, another change from prior years.

Although not part of the credit, the ARPA increases the amount of employer-provided dependent care assistance that can be excluded from an employee’s gross income to $10,500 from $5,000 ($5,250 for married filing separately from $2,500).