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2021 Child and Dependent Care Credit

The child and dependent care credit is a tax credit that may help you pay for the care of eligible children and other dependents (qualifying persons). The credit is calculated based on your income and a percentage of expenses that you incur for the care of qualifying persons to enable you to go to work, look for work, or attend school. For tax year 2021, the American Rescue Plan Act of 2021 which was enacted March 11, 2021, made the credit substantially more generous by increasing eligible expenses from $3,000 to $8,000 for one eligible person and from $6,000 to $16,000 for two or more eligible persons. It also makes the credit fully refundable.

The maximum credit rate also increases from 35% to 50% and the adjusted gross income (AGI) level at which this percentage is reduced increases substantially from $15,000 to $125,000. The child and dependent care credit begins to phase out when a taxpayer’s AGI exceeds $125,000 and is fully phased out for AGI over $438,000. The maximum credit is $4,000 ($8,000 x 50%) for one qualifying person or $8,000 ($16,000 x 50%) for two or more qualifying persons.

Special Rules for Married Filing Separately

If your filing status is "Married Filing Separately", you may now be able to claim the child and dependent care credit if:

• You lived apart from your spouse during the last six months of year 2021,

• Your home was the qualifying person's main home (defined below) for more than half of year 2021, AND

• You paid more than half of the cost of keeping up that home for year 2021.

Main Home in the United States

To be eligible for the refundable portion of the child and dependent care credit for tax year 2021, you (or your spouse if married filing jointly) must have your main home in one of the fifty states or the District of Columbia for more than half of the tax year. If you are temporarily away from your main home because of illness, education, business, vacation, or military service, you are generally treated as living in your main home during that time.

Employer-Provided Dependent Care Benefits

Under the new law, the exclusion for employer-provided dependent care assistance increases from $5,000 to $10,500 ($5,250 for married filing separately).