 Income tax 2021-2022, child and dependent care expenses credit overview. Get ready to get refunds to the max diving into Income Tax 2021-2022. Most of this information can be found in the Form 1040 Tax Year 2021 Instructions IRS website irs.gov irs.gov. Income tax formula down in the credit area noting that both credits and deductions are good. If you had a dollar credit versus a dollar deduction credit typically better because you would generally get the full dollars worth on the credit as opposed to the dollar of deduction which would be a dollar decrease to the taxable income then tax being calculated on it. Also note that we have the refundable and non-refundable types of credits or categories of credits. Refundable credits mean that they won't take your liability in essence below zero whereas the refund that's what the non-refundable means. The refundable credits mean that they might take your liability below zero resulting in a situation where you could possibly get a refund which isn't really a refund but might be called a refund that's really more of like a benefit type of program and we could have some credits that have a non-refundable and refundable component to them. So this is going to be the second page of the form 1040 we're looking down here we're ultimately the credit will flow into it's going to go from the form to the schedule three and then to the second page of the form 1040 line 31. We're looking at the form that being the 2441 the child and dependent care expenses that's the credit form that we're focused on this time. Also just note that we're not talking about the child tax credit here that's a different credit we're talking about the child and dependent care expenses credit they sound simpler but they're different this is not the child tax credit this is the child and dependent care expenses we're focusing in on here. So what's new with this credit changes to the credit for child and dependent care expenses for 2021 for 2021 the American Rescue Plan Act of 2021 otherwise known as the ARP the ARP increases the amount of the credit for child and dependent care expenses so that's typically a good thing obviously software is helpful for us to be able to calculate these items but we want to have some idea of them as well so that we can help to plan and budget although note the tax years will change especially through this time frame it looks like the laws you know are going through a fluctuating period at this point in time and but we also want to be able to kind of deconstruct what is happening so we could explain it to ourselves and to the clients to make sure that there's no mistakes in the preparation so it also makes the credit refundable for taxpayers that meet certain residency requirements so refundable that means that the credit could still give you a refund basically which is more like a benefit program if your tax liability goes below zero so that's obviously usually a good thing for taxpayers increases the percent of employment related expenses for qualifying care considered and calculating the credit so obviously that's generally good because that would generally be of the capacity to increase the amount of the credit and modifies the phase out of the credit for higher earners so if they increase the phase out then that would typically be good as well because this credit will like many credits start to go down you'll get less of it as incomes reach higher or go past certain thresholds for 2021 you may claim the credit on qualifying employment related expenses up to a thousand dollars previously three thousand dollars if you had one qualifying person or sixteen thousand dollars previously six thousand dollars if you had two or more qualifying persons the maximum credit in 2021 increases to 50 percent of your employment related expenses which equals a maximum of four thousand dollars if you had one qualifying person calculated as 50 percent of a thousand or eight thousand dollars which is calculated as 50 percent of 16 thousand dollars if you had two or more qualifying persons so it kind of caps out of that two qualifying persons as they as they increase the cap level there so the more a taxpayer earns the lower percentage of employment related expenses that are considered in determining the credit under the arp the adjusted gross income level at which the credit percentage starts to phase out it is raised to 125 thousand dollars for 2021 above 125 thousand dollars the 50 percent credit percentage goes down as income rises so it's a fairly high level here so 125 thousand dollars and that's the and then you got this phase out of course that takes and starts to happen and they do that by adjusting the percent of the 50 percent credit percentage so for 2021 the credit figured on line nine a is unavailable for any taxpayer with adjusted gross income over 438 thousand dollars fairly high level there however you may still be eligible to claim the credit on line nine h not nine b and here's the tax form just so you could see nine a is here and then nine b if you had 2020 expenses in 2021 you could complete the worksheet and so on and so forth so well jumping back on over just to get an idea of the return here see the instructions for line eight for the 2021 phase out schedule to see if you meet the residency requirements to qualify for the refundable credits see instructions for line b the refundable credit is reported on line 10 so quick look at the tax return here is line 10 on on the form the non-refundable credit is reported on line 11 for more information about the credit you can see publication 503 child and dependent care expenses available at irs.gov forward slash pub 503 and frequently asked questions at irs.gov changes to dependent care benefits for 2021 the arp the arp permits employers to increase the maximum amount that can be excluded from an employee's income through a dependent care assistance program so this is kind of a type of benefit program and that's beneficial to the employee and it's usually easily reported because it's kind of taken care of on the employer side of things meaning on the w2 form the amount that was going towards the dependent care benefits would be excluded to the extent possible in line one and then be recorded down here in line 10 so anything that got decreased or removed from line one would be good because that would mean that the employee got a benefit from that but they don't have to include it in income which is reported on line one that's going to be subject to the income tax the federal income tax it's useful to be able to understand that because then you could have some interplay between the amount reported on this w2 for the dependent care benefits and the credit that were basically taking into consideration also employees can get a little bit confused because when they start looking at their income and they get a lot of these great benefits that some some companies can provide that will lower the amount that's reported in box one and they start to feel like well i'm not actually earning that much money and it's like no you are earning that much money it's just that it's not being reported in box one because your employer is so good at basically giving you these kind of benefit programs that aren't being subject to taxes so note that to figure out what you're actually earning it might be actually easier to look at say like box five or something like that uh because it might actually be higher so it's it's useful to be able to explain that you know to employees a little bit as as well or to to clients just to see how these benefits are kind of working out okay back to it we're going to say then that the uh for 2021 the maximum amount is increased to 2500 so that's the amount that could be excluded basically from box one of the w2 in in essence it was previously only 5000 for married employees filing separate returns the maximum amount is increased to 5250 previously only 2500 dependent care benefits are reported online 12 so if we look at our actual tax return we're now on page two of our form 2441 online 12 we have enter the total amount of dependent care benefits you received in 2021 amounts you received as an employee should be shown on box 10 of your form w2 don't include amounts reported as wages in box one of form w2 so basically this would be reported then on the w2 when you do the data input for the w2 you generally put this in in there as well and that's going to have an impact on your calculation so if we said we had 5000 of the expenses then this in essence is going to decrease it down to 4500 which is going to be what the what the calculation instead of 5000 is going to be you know based upon because we can't really double dip in other words get two two benefits for the same amount of of the of the money that we're spending here because we already got to decrease it from the wages that was done on the employer side of things for in this case that $500 that we're looking at so we can't then get a credit on it too because that would be kind of doubling up on the same money so temporary special rules for dependent care and flexible spending arrangements that's the fsa's section 214 of the taxpayer certainty and disaster tax relief act of 2020 provides temporary COVID-19 relief for dependent care fsa's these this legislation allows employers to amend their dependent care plan to allow unused amounts to be used in a subsequent year it also allows employers to amend their dependent care plan to allow participants to use amounts in a subsequent year if a dependent turned 13 before the funds were used unused amounts from 2020 are added to the maximum amount of dependent care benefits that are allowed for 2021 so you got to basically make sure that you're up to date on the rules for putting money into the plan and basically spending the money so if you if that kind of plan is available to you through your employer you want to basically you know read up and and do you know ask them questions about it to make sure that you have the understanding of it if you're thinking about putting a plan like that in place as an employer or talking about that with clients then you know you want to dig into that and do some more research on it so new checkbox on line one column d there is a new checkbox on line one column d for you to indicate if your care provider is your household employee so c column d under line one later so jumping over to the forum just to see that we've got column d here check here if your care provider is your household employee credit for prior years expenses and worksheet for 2020 expenses paid in 2021 the credit for prior years expenses is now reported separately on line 9b previously it was added to the current year credit and reported together on one line we moved worksheet a worksheet for 2020 expenses paid in 2021 from publication 503 to the end of these instructions if you pay 2020 expenses in 2021 you must complete worksheet a to figure the amount to enter online 9b c instructions for line 9b reminders married persons filing separately a checkbox online a generally married persons must file a joint return to claim the credit so remember that if you're if you're you either have like single which has the categories of like head of household or or single and then if you're married you can typically file either married joint or married separate if you choose to file married separate if married then a lot of times you're going to be restricted in terms of the credits because the iris is kind of skeptical that people are going to take advantage of the credit calculations in that instance so if you claim the credit and your filing status is merely filing separately you are required to show you meet the special requirements listed later under married persons filing separately by checking the box located online a above part one on form 2441 c line a later for more information there reminders continued purpose of form if you paid someone to care for your child or other qualifying persons so you and your spouse if filing jointly could work or look for work in 2021 you may be able to take the credit for the child and dependent care expenses so note the the rationale here of the credit at least on its face here the rationale of the credit is to be able to pay for the care so that you can work so obviously if you're an individual or a filing single or head of household one person with a dependent then if you're working then you're going to be applying for the credit might be applied to you if you're married we end up with some more complications because you could end up in a situation where one person is working and the other person isn't working how does the iris kind of determine that basically if you don't have any earned income then the iris might be saying you could you could see the justification would be well then if that other person isn't working then you shouldn't really need to be paying for the dependent care because they should be able to do the dependent care so typically you would think then that you might have like some level of income that would be earned income for both spouses in a married situation in order to basically qualify for a credit that is designed to free up people for the purpose of work so that's the general idea in addition if you or your spouse of filing jointly received any dependent care benefits for 2021 you must use form 2441 to figure the amount if any of the benefits you can exclude from your income you must complete part three of form 2441 before you can figure the credit if any in part two you and your spouse of filing jointly must have earned income to take the credit or exclude dependent care benefits from your income so that's the general idea they got to both be working how would the iris know that you'd have some kind of earned income w2 income typically or some other kind of earned income like a schedule c possibly or something like that to show that they're both working because that's the rationale for the credit was a student or was a student or disabled later if either of these if these circumstances applies additional information you can see publication 503 for more details also see frequently asked questions at irs.gov forward slash c d c c f a q f