Many taxpayers with children will benefit from the enhanced Child Tax Credit. Families should refrain from… [+] ignore the newly enhanced Child and Dependent Care Credit’s benefits.
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Last March, Congress passed the American Rescue Plan, which included $1.9 trillion in economic compensation for people and businesses affected by the Covid-19 outbreak. The Plan featured tax incentives targeted expressly to support families, including enhancements of the Child Tax Credit (CTC) and the Child and Dependent Care Credit, in addition to the popular Economic Impact Payments (stimulus cheques). The Child Tax Credit Has Been Expanded
The CTC’s growth is intended to help 39 million families with children. For the time being, the enlarged credit only applies to tax year 2021, although many members of Congress have voiced a desire to prolong the benefits until 2025, when the provisions of the Tax Cuts and Jobs Act (TCJA) expire, or to make the expanded credit and advance payments permanent.
The enhanced credit raises the CTC from $2,000 to $3,000 per qualifying kid for children aged 6 to 17, and from $3,600 to $3,600 per qualifying child for children under the age of 6. The credit has also been made completely refundable (you can earn the whole amount even if you don’t owe any federal income taxes) and an additional year of eligibility has been added. Children formerly “aged out” of the credit at the age of 16, but under the new criteria, children as young as 17 are eligible.
In addition, qualified families can now pay half of the credit in monthly installments of $250 or $300. In June, the IRS began sending out Letters 6416 and 6416-A to qualified households. The letters not only warn families of their possible eligibility for advance payments, but they also provide an estimate of the amount of the payments. Families that do not require the advance payments can opt out of receiving them and instead receive the full credit amount when they complete their 2021 tax returns. By opting out of advance payments, you can lower your tax bill or get a bigger refund.
Income thresholds apply to both the expanded and base CTCs, as they do to other tax credits. In two stages, the credit will be phased out. First, at an adjusted gross income (AGI) of $75,000 for a single filer, $112,500 for heads of household, and $150,000 for joint filers, the enlarged amount ($1,000 or $1,600 depending on age) begins to phase out. For each $1,000 over the threshold, the credit is decreased by $50, but not below $2,000 (the unexpanded amount of the CTC). As a result, the enlarged credit amount for children aged 6 to 17 is entirely phased out at $95,000 for children aged 6 to 17 and $107,000 for children aged 6 to 6. (for single filers). A single parent with two children ages 12 and 13 and an AGI of $80,000, for example, would have their extended credit decreased by $250 per child, reducing the amount of their six advance payments by around $43 per child.
ADDITIONAL INFORMATION FOR YOU
The TCJA increased the income thresholds for singles, separate filers, and heads of household to $200,000 for singles, separate filers, and heads of household, and $400,000 for joint filers in the second phase of the phaseout. Because the phaseout computation is the same as for the first step ($50 per $1,000 of additional income), the credit is phased out completely at $240,000 and $440,000, respectively.
The Child and Dependent Care Credit has been expanded.
While the extension of the Child Tax Credit is now receiving the most attention, the expansion of the Child and Dependent Care Credit also provides significant tax benefits for working families in 2021. Attach Form 2441, Child and Dependent Care Expenses, to your annual income tax return to claim the credit (Form 1040). The care expenses must be used to allow the parent or parents to work in order to qualify for the credit. To be eligible, both parents in a two-parent household must work. A parent, on the other hand, is regarded to have earned income if they were a full-time student at a qualifying institution or unable to care for oneself for any month or portion of a month. Children under the age of 13 are eligible, as are costs for a disabled spouse and older qualifying dependents who require care. Working parents’ daycare definitely qualifies for the credit. Summer programs and day camps, as well as before and after school programs, qualify. Overnight camps, on the other hand, are not eligible expenses for the credit. Certain expenses may qualify as Schedule A (itemized deductions) medical expenses and as eligible expenses for this credit depending on the circumstances. Taxpayers should select the alternative that best suits their needs, but they cannot claim both benefits with the same expenses (no double dipping).
The increased Child and Dependent Care Credit, like the expanded CTC, has a number of advantages. The first is that it is entirely refundable. Taxpayers who incur these costs and are eligible for the credit but do not owe any federal income taxes will receive a refund for the entire amount of their credit. For 2021, the amount of qualified expenses has been raised from $3,000 to $8,000 for one qualifying child, and from $6,000 to $16,000 for two or more qualifying children. This hike will be welcomed by everyone familiar with the cost of daycare. Moreover, in previous years, the credit was limited to 20% to 35% of the lower of qualified expenses or generated income. For people with an AGI of $125,000 or less in 2021, the maximum credit limit is increased to 50% of qualified costs or earned income (whichever is smaller). Taxpayers with AGIs greater than $125,000 will still be eligible for the credit, but the 50% ceiling will be steadily reduced until the credit is totally phased out at $438,000.
Employer dependent care benefits recipients can now deduct up to $10,500 in eligible expenses from their taxable income (in total, not per kid), more than doubling the prior exclusion level of $5,000. However, because the credit has a higher percentage maximum and higher thresholds on qualified expenses, it may be preferable to the income exclusion. Using an employment plan to deduct qualified expenses from income or electing the credit is not a binary choice. Taxpayers can decide to use their employer’s qualifying plan to exclude qualified expenditures and receive the tax credit for amounts paid that were not already excluded from income as long as the expenses qualify and are not double-dipped. To put it another way, if you have two children who qualify and have already contributed $5,000 to an employer plan (perhaps because you were unaware of the new, higher exclusion limit), you can still take advantage of the credit for an additional $11,000 in eligible expenses. Taxpayers who have their returns prepared by a tax professional may wish to schedule a planning meeting to ensure that they are getting the most out of their benefits.
Additional information on claiming the Child and Dependent Care Credit can be found in IRS Publication 503 and the IRS FAQ on the subject./n
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