The $1.9 trillion stimulus package is called the American Rescue Program Act (ARPA) and includes major changes to the long-term federal income child and dependent child credit (CDCC).
Unless you are in the high-income category, the change is beneficial.
There is a catch: the change is temporary.
After first introducing some necessary background information, you need to know the following.
Child and Dependent Credit (CDCC) basis
Taxpayers with one or more qualified individuals are eligible for CDCC. The credit includes the eligible expenses you pay to take care of one or more qualified individuals so that you can work, or if you are married, both you and your spouse can work. If you are married, you must usually file a combined 1
A qualified person is defined as your child under 13 years of age, stepson, foster child, brother or sister, step sibling, or the offspring of any of them. This person must live in your house for more than half a year and cannot provide more than half of their own support. A disabled spouse or disabled dependent who has lived with you for more than half a year can also be a qualified individual.
Typical eligible expenses are payments to daycare centers, babysitters or nurseries. The cost of overnight camp is not eligible. Private K-12 school fees are not eligible because they are considered education expenses, not nursing expenses. However, pre-school and after-school program expenses are eligible. As long as at least part of the cost is used for the care of qualified personnel, the cost of housekeeping services can also be considered qualified.
Focus: Prior to ARPA, CDCC did not issue refunds, which meant that it could only be used to offset your federal income tax liability. If you do not take any responsibility, then you will have no credibility. But by 2021, the credit limit will be refundable to most people, which will be explained later.
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Before and after the ARPA change, eligible expenses cannot exceed your income or your spouse’s (if you are married) income from work, self-employment or certain disability and retirement benefits. If you are married, you must generally use the income earned by the lower-income spouse for this restriction.
Therefore, according to the general restriction rules, if the spouse has no income, he/she cannot apply for CDCC. However, if your spouse has no income and is a full-time student or person with a disability, then if you have a qualified individual, he or she is considered to have an imaginary monthly income of $250, and if you have two or more Qualified individuals are considered individuals with an imaginary monthly income of $500. In this exceptional case, you can ask for CDCC even if your spouse does not actually have a job and has no actual income.
Prior to ARPA, eligible expenses (after the above restrictions) could not exceed USD 3,000 for nursing care for one qualified person, and no more than USD 6,000 for nursing care for two or more qualified persons.
Before ARPA, if the taxpayer’s adjusted gross income (AGI) for the year was $15,000 or less, the maximum credit was equal to 35% of the eligible expenses. Therefore, for taxpayers with very moderate incomes, the maximum credit for an eligible individual is US$1,050 (US$3,000 x 35%), while the maximum credit for two or more individuals is US$2,100 (US$6,000 x 35%). 35%).
Prior to the ARPA issuance, for every AGI $2,000 (or part of it) exceeding $15,000, the credit rate was reduced by one percentage point until the interest rate fell to the minimum level of 20%. Therefore, if your AGI exceeds $43,000, the credit limit will be reduced to a minimum of 20%. The maximum income credit for one qualified individual is US$600 (US$3,000 x 35%) and for two or more individuals is US$1,200 (US$6,000 x 20%).
Temporary changes that benefit taxpayers
Only in the 2021 tax year, ARPA will make the following temporary changes.
Credit may be refunded
For 2021, the CDCC can refund taxpayers who have resided in more than half of their primary residences in the United States. If the couple is married together, either party can meet this requirement.
For most taxpayers, the credit limit may be much larger
In 2021, if you have a qualified individual (increased from USD 3,000), the USD limit for eligible fees for applying for CDCC will be increased to USD 8,000, and if there are two or more individuals (from USD 6,000) to USD 16,000 .
In 2021, the maximum credit rate will increase from 35% to 50%.
However, for every $2,000 (or less than $2,000) of AGI that exceeds $125,000, the credit interest rate will be reduced by one percentage point in 2021. Therefore, if your AGI exceeds $183,000, the tax rate will be reduced to 20%. Before ARPA, the AGI threshold of the credit rate reduction rule was only $15,000, and if your AGI exceeds $43,000, the interest rate is reduced to 20%.
For 2021, the highest CDCC for taxpayers with an AGI of $125,000 or less is $4,000 for one qualified individual ($8,000 x 50%) and $8,000 for two or more qualified individuals ($16,000 x 50%). Prior to ARPA, the maximum credit limit was only US$1,050 and US$2,100, respectively.
For 2021, the highest CDCC for taxpayers whose AGI exceeds $183,000 is $1,600 for one qualified individual ($8,000 x 20%) and $3,200 for two or more qualified individuals ($16,000 x 20%). Before ARPA came into effect, when the credit tax rate was reduced to 20%, the maximum credit limit was only US$600 and US$1,200, respectively.
So far, so good.
Example 1: If you are not married in 2021, you will pay a qualifying fee of $15,000 to take care of your two qualified children so that you can work. You can calculate the entire $15,000 to calculate CDCC. Suppose your 2021 AGI is $132,000. With an AGI exceeding $7,000, your credit rate is reduced from 50% to 46%. Specifically, the 4 percentage point reduction is because you have 3 x $2,000 of excess AGI plus a small portion of $2,000 of excess AGI. Therefore, your allowable CDCC is $6,900 ($15,000 x 46%). helpful.
Credit interest rates for high-income taxpayers are further reduced or cancelled
For 2021, if your AGI is between $183,001 and $400,000, a 20% credit rate will apply. However, once your AGI exceeds $400,000, the second credit rate reduction rule will be activated. For every $2,000 (or part of) AGI over $400,000, the credit rate will be reduced by one percentage point. Therefore, if your AGI exceeds $438,000, the tax rate is reduced to 0%.
Example 2: Same as example 1, except this time your 2021 AGI is $420,000. Thanks to your $20,000 extra AGI, your credit rate is reduced from 20% to 10%. Specifically, the 10 percentage point reduction is because you have an excess AGI of 10 x $2,000. Therefore, your allowable CDCC is $1,500 ($15,000 x 10%). Something is better than nothing.
Example 3: Now, suppose your AGI is $438,500. Thanks to your $38,500 additional AGI, your credit rate is reduced from 20% to 0%. Specifically, the 20 percentage point reduction is because you have an excess AGI of 19 x $2,000 plus a small portion of the excess AGI of $2,000. Therefore, due to your high income, CDCC has been completely eliminated. I am sorry.
Liberalized CDCC and Liberalized Family Care Flexible Expenditure Account (FSA)
In 2021, ARPA will also increase the maximum amount you can contribute to an employer-funded flexible care expenditure account (FSA) for dependents from $5,000 to $10,500. Contributions will reduce your taxable wages for federal income and payroll tax purposes (and, if applicable, usually for state income tax purposes). You can then withdraw tax-free payments to compensate eligible dependents for care expenses.
Depending on your specific situation, you can have support that meets CDCC qualifications and tax-exempt FSA support support. If you fall into this situation, you can make some donations to your dependent FSA, collect income and payroll tax savings, and use tax-free withdrawals to reimburse eligible expenses.
Then, you can require CDCC to charge “excess” qualified fees in accordance with the CDCC rules, but subject to CDCC’s restrictions on qualified fees. To calculate your allowable CDCC, please fill out IRS Form 2441 (Child and Dependent Care Costs) and include it in your 1040 form. The allowed credit amount will be shown on page 2 of the 1040 form.
Is it better for you to forget the FSA option and just ask for CDCC? It depends on your income and other factors. Contact your tax expert.
The changes to the CDCC rules for the 2021 tax year are not simple. A related question is, if your employer provides an FSA agreement, then how best to use the CDCC and the Dependant Flexible Expenditure Account (FSA) option. This adds another layer of complexity. Finally, please note that in addition to using CDCC and FSA transactions, you can also apply for the 2021 child tax credit. Guys, this is some excitement.
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