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Great News, Child Care Tax Credit Expanded for 2021
Article Highlights:
- American Rescue Plan Expanded
- One-Year-Only Change
- Refundability
- Child Care Expenses
- Credit Percentage
- Maximum Credit
- Credit Phaseout
- Employer-Provided Dependent Care Assistance
The credit increases and other provisions of the ARPA that apply to this credit only apply to 2021. The increase in the credit is part of the government’s effort to ease families’ financial burdens during the pandemic.
A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the childcare credit is nonrefundable. However, for 2021, it is fully refundable if the taxpayer’s primary residence (or at least one spouse on a joint return) is in the U.S. for more than half the year.
The credit is based upon a percentage of the taxpayer’s care expenses for a child under the age of 13 (the expenses count up to the date the child actually turns 13) that allow a taxpayer to work. In the case of a married couple, the credit only applies if they are both employed. There are special provisions for a spouse who is disabled or a student that are not covered in this article.
There is a maximum to the expenses that can be used to figure the credit for 2021:
- $8,000 for one child, up from the normal $3,000 in any other year.
- $16,000 for two or more children, up from the normal $6,000 in any other year.
A combination of the higher maximum expenses and the 50% rate results in a significant increase in the maximum credit:
- $4,000 for one child (50% of expenses up to $8,000)
- $8,000 for the care of 2 or more children (50% of expenses up to $16,000)
In addition, since the purpose of the credit is to help lower-income workers’ childcare expenses, the expenses used to calculate the credit are limited to the taxpayer’s income from working. In the case of a married couple, the expenses are limited to the working income of the lowest-earning spouse.
This all may seem a bit complicated, so here is a typical example:
For those who enjoy employer-provided dependent care assistance, the ARPA also changes (for 2021 only) the exclusion for employer-provided assistance for dependent care, increasing the maximum amount of excludable earnings from $5,000 to $10,500 for a married couple filing jointly ($5,250 for married filing separate).
If you have questions about how this one-year change might affect your tax situation, please give this office a call.
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Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
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Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
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