facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Military Finances 201: The Childcare Tax Credit Thumbnail

Military Finances 201: The Childcare Tax Credit

Taxes

One of the changes to the tax code in response to COVID-19 that didn't get much press was changes to the child (dependent) care credit. For most of you that pay childcare expenses in order to work, the changes will be good news. For a few of you, it won't be. So, what's the deal?


Increased Dollar Limits

Under the "old" law you could claim up to $3,000 in childcare expenses, if you have one child, to start the calculation of the credit. For those with two or more children, the limit was $6,000. Under the American Rescue Plan (ARP) the amount of expenses allowed increase to $8,000 for taxpayers with one child and $16,000 for taxpayers with two or more children.

Since the dollar limits have been increased, most taxpayers will start in a better position than they did prior to the change.

Increased Percentages When Calculating the Credit

Prior to the ARP, the maximum percentage used when calculating the credit was 35% and it quickly phases out to 20% for taxpayers with an AGI of $45,000. Under the ARP, the maximum percentage is 50% and it doesn't begin to phase out until $125,000 of AGI. It will be phased down to 20% by $185,000 of AGI (note that these limits are not dependent on filing status). That means more taxpayers will be eligible for a bigger credit. So, what does that look like in "real" numbers?

Under the old law, the maximum credit for taxpayers with one child was $1,050 with a minimum of $300. For taxpayers with two or more children, the amounts are doubled. Under the ARP, the maximum credit for taxpayers with one child is $4,000 and for those with two or more children, the maximum credit is $8,000. The minimum for many taxpayers will be $1,600 for those with one child and $3,200 for those with two or more children. Note that I said "many".

Here is the Bad News

Under the old law, all taxpayers that had qualifying childcare expenses received a minimum credit. Under the ARP, there is a second phase-out starting at $400,000 of AGI (all filing statuses) and the credit is completely phased out by $440,000. If your income is in or above that range, you'll get a smaller childcare credit than you did in 2020.

There is More

Normally, the childcare credit isn't refundable. Under the ARP it is. It might not affect you, but it could affect some of your troops or people you know. Refundable credits allow the taxpayer to get a refund in excess of the income tax they had withheld. It is a form of direct payment of government funds to taxpayers.

And another reminder, you only qualify for the credit if the care is required for you (both spouses if married) to work.

Military Finances are Different

While this Tax Code change applies to all Americans, that isn't always the case. There are many special provisions in the tax code that apply only to Active Duty and Retired Senior Military Officers and NCOs. The same is true in regard to the rest of your financial affairs. That's why we think you should work with a financial advisor or planner that works with folks like you every day. If you'd like to chat about how we help Active and Retired Military Members reach their financial goals, give us a call or use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

Unwrapping the American Rescue Plan


Coordinating GI Bill Benefits and Scholarships


Military Finances 101: Survivorship Life Insurance




 

Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.