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.
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