This lesser-known tax credit score can present households with one other write-off
The expanded child tax credit caught US attention this summer as millions of families received payments.
But Congress this year also increased a lesser-known allowance for working families: the tax credit for children and dependents.
Often mixed with the child tax credit, the child and care tax credit offers working parents a tax advantage to cover the costs of caring for children under the age of 13 or adult dependent persons.
Previously, families could claim up to $ 3,000 in expenses per dependent for a maximum of $ 6,000. However, the American rescue plan increased the eligible costs to $ 8,000 per relative for 2021, up to a maximum of $ 16,000.
This year, families can get up to 50% of that expense as refundable credit, depending on their income, which means they can reduce their tax burden or offer a refund regardless of liability.
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“The changes to the US rescue plan will have a huge impact on families and their childcare costs,” said Linda Smith, director of the Bipartisan Policy Center’s Early Childhood Action Initiative.
While many families have received payments for the child tax credit, nearly 50% are unaware that they can claim another tax break on child and care expenses, according to a survey by the bipartisan Policy Center.
The move from non-refundable to refundable credit will reach more Americans because “a lot of low-income families just don’t have to pay taxes,” Smith said.
The expanded benefits could also boost high earners, said Sallie Mullins Thompson, a certified financial planner and accountant on her behalf in New York.
The 2021 50% credit begins to expire if the Adjusted Gross Income is above $ 125,000 and a family is no longer eligible once it exceeds $ 438,000.
However, there are strict rules to qualify, Mullins Thompson said.
There must be an eligible child or dependent and the families must have an income from work that is in the form of wages or payments other than investments. In addition, the expenses must be “work-related” so that both spouses can work outside the home.
“The childcare provider needs to be a functioning, functional company,” she added.
The non-partisan Policy Center has a calculator that shows how much families can receive, and taxpayers can learn more about eligibility through the IRS.
The cost of childcare
Before the pandemic, families spent an average of $ 9,200 to $ 9,600 per child on childcare, according to the nonprofit Child Care Aware. These costs represent approximately 10% of household income for married couples and 34% for single parents.
However, the exact cost of childcare varies widely based on location and type of services, and many parents struggle to pay the bill.
According to an October 2019 survey by the bipartisan Policy Center, around 54% of parents said it was difficult to find quality childcare within their budget.
As a result, respondents reduced spending on non-essential items (75%), everyday groceries (59%) or money saved on emergencies (57%).
“I think one of the things we have learned from the Covid experience is what a critical part of this country’s childcare economic structure really is,” said Smith. “And without them, families have to struggle.”
President Joe Biden called for the credit changes in the American Families Plan to be made permanent. Although it’s unclear whether Congress will extend the extended benefits beyond 2021, some experts see support on both sides of the aisle.
“I think there is quite a lot of bipartisan interest,” said Smith. “We are very confident that this will continue next year.”