US News
Child and Dependent Care Credit 2021: who qualifies for it?
Changes made under the American Rescue Plan could increase eligibility for the Child and Dependent Care Credit.
The Child and Dependent Care Credit (CDCC) allows those who are fully employed a tax break if they have contracted a caretaker to look after their children thirteen and younger or a or “dependent who isn't able to care for himself or herself.” Other types of expenses made to care for a qualifying individual can also be claimed.
The CDCC forms part of the Household and Dependent Care Credit allows those eligible to cover “expenses paid for the care of a qualifying individual [...[], if the primary reason for paying the expense is to assure the individual's well-being and protection.” The American Rescue Plan made some changes to the credit that could make more individuals and families eligible to receive the benefit. The changes will come into effect next year when taxes are filed for 2021.
What changes were made to the credit?
The tax credit has been shown by researchers to encourage workforce participation. This year as schools closed and many had their children at home, the benefit was enhanced to help working parents stay in their jobs.
This year, even if a spouse has lost their job, the couple can claim the benefit. Before, both spouses had to be employed in order to be eligible. Additionally, the credit has gone from being non-refundable to fully refundable as long as an individual has a permanent residence in the United States.
The value of the credit was also increased under the American Rescue Plan. Before, expenses claimed could only form 35% of total spent. This percent has been increased to fifty. However, for any individual or family making more than $125,000, the percent of expenses able to be claimed diminishes.
Those who put the money allocated for dependent care in a Flexible Spending Account, to avoid taxation on these funds, are able to deposit a total of $10,500 this year. This is double the amount allowed in previous years.
What are the eligibility requirements?
The eligibility requirements to claim this benefit relate to both the taxpayer and the qualified dependent.
To claim the benefit, one must have earned an income for the year the benefit is being claimed. The IRS defines an “earned income” as “wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. A net loss from self-employment reduces earned income. Earned income also includes strike benefits and any disability pay you report as wages.” When reporting the expenses to be claimed, taxpayers should be intentional about which expenses to include. The credit only applies to those that are "primarily for the care of the individual.”
Additionally, if your employer provides a stipend to cover care for dependents, that total must be deducted. In describing the cost of the expenses, the tax authority states that the cost claimed, “may not exceed the smaller of your earned income or your spouse's earned income; however, a special rule applies if your spouse is a full-time student or incapable of self-care.”
What is a qualifying dependent?
According to the IRS, those eligible looking to claim the benefit must pay for care for one of the following profiles:
- A child who was under the age of thirteen at the time the care was provided.
- A spouse who was “physically or mentally incapable of self-care and lived with you for more than half of the year.”
- Lastly, “An individual who was physically or mentally incapable of self-care, lived with you for more than half of the year, and either: (a) was your dependent; or (b) could have been your dependent except that he or she received gross income of $4,300 or more, or filed a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another taxpayer's 2020 return.
What if these changes were made permanent?
Researcher Gabrielle Pepin found that if this change were made permanent, it would increase eligibility substantially among single-parent households. These changes would also make many more Black and Hispanic households eligible, as they are “less likely to qualify for the nonrefundable credit.” Through her research, Peppin found that “about 5 percent of single parents would gain celebrity and receive on average over $1,000 in benefits annually.”
Additionally, researchers have noted that there are racial inequalities at play in the eligibility requirements as across racial groups, eligibility vary widely. Twenty-one percent of white families, seventeen percent of Black families, and thirteen percent of Hispanic families qualify for the credit. Pepin modeled how making the credit fully refundable would impact eligibility and found that it could increase by two and three percent for Black and Hispanic families.