With the ebb and flow of the pandemic last year, you probably had the kiddos back in childcare more than 2020 which definitely made an impact on your wallet. Thanks to Covid, childcare costs increased by roughly 10% which means families are paying an average of $300 a week per child at care centers, not to mention higher costs for options like nannies or if you have an infant. Basically, your childcare is like another mortgage.
Thankfully, the Child and Dependent Care Tax Credit was expanded for 2021 which could mean savings for parents. Different from the Child Tax Credit, it helps parents cover childcare costs while looking for or attending work, for kids 13 and under and adult dependents. So how is it expanded?
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Normally the cap for eligible expenses is $3,000 for one child and $6,000 for two or more. For your 2021 tax return, you’ll be able to claim expenses for up to $8,000 for one child or $16,000 for two or more. That’s a huge jump!
You may also be able to write off up to 50% (up from 35%) of your childcare expenses if your income is $125,000 or lower. That credit starts to phase out the higher the income: 20% for $183,000 to $400,000 and nothing above $438,000.
There is a catch: if you already pay for childcare using a dependent care flexible spending account, you cannot use those expenses towards the tax credit because that money is pre-tax and you’re already getting a tax break. However, if your costs go above what you’ve used from your FSA, you might be able to claim the difference up to either $8,000 or $16,000, depending on your family situation.
Another bonus: the credit for 2021 is refundable! So even if you don’t have a tax liability, you could end up with cash in your pocket thanks to a refund.
The expanded credit is only for the 2021 tax credit, so use it while you can!
––Karly Wood
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