For tax year 2021 only, the amount of the child and dependent care tax credit is significantly enhanced under the American Rescue Plan Act of 2021. In addition, the maximum exclusion of employer-provided dependent care assistance is also increased
Under current law, the amount of the credit is equal to 35 percent of qualified expenses for care of a qualifying individual up to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. However, the credit percentage is reduced by one point for every $2,000 of adjusted gross income in excess of $15,000, until reaching 20 percent, at which point it is no longer reduced.
The American Rescue Plan increases the credit to 50 percent of qualified expenses and reduces the credit percentage by one point for each $2,000 of adjusted gross income in excess of $125,000. The credit percentage is then not further reduced below 20 percent until adjusted gross income reaches $400,000, at which point the reduction of credit percentage continues until reaching zero. Additionally, the amount of eligible expenses qualifying for the credit are increased to $8,000 for one individual and $16,000 for two or more individuals. Finally, the credit is made fully refundable.
In addition to the changes to the credit, the maximum exclusion of employer-provided dependent care assistance is also increased for 2021 to $10,500, or $5,250 in the case of a married taxpayer filing separately. These amounts are roughly double the maximum exclusion under current law.
These changes are applicable to 2021 only.