IRS Issues FAQ on Child and Dependent Care Tax Credit for 2021, Jun 17, 2021

Last week, the IRS released new FAQ to help taxpayers understand the expanded child and dependent care tax credit in 2021. For 2021, eligible taxpayers can claim qualifying work-related expenses up to $8,000 for one qualifying person, or $16,000 for two or more qualifying persons (up from $3,000 and $6,000 in prior years). To claim the credit, taxpayers are also required to have earnings. The FAQ is clear that the amount of qualifying work-related expenses claimed cannot exceed the taxpayer’s earnings. Additionally, the taxpayer must subtract employer-provided dependent care benefits, including those provided through a flexible spending account, from total work-related expenses when calculating the credit. As in prior years, the more a taxpayer earns, the lower the percentage of work-related expenses that are taken into account in determining the credit. However, the credit is fully refundable for the first time in 2021. This means eligible taxpayers can receive the credit even if they owe no federal income tax. To be eligible for the refundable credit, a taxpayer (or the taxpayer’s spouse on a joint return) must reside in the United States for more than half of the year. For more information on the credit, see Q 758.