NEW Dependent Care Benefits for 2021

NEW & Increased Dependent Care Benefits for 2021
From The Tax Institute of H&R Block – June 2021
Q.
Clients Michal and Aniela have two children, ages 2 and 4. Michal’s company offers
dependent care benefits. Earlier this year his company allowed employees to increase
their maximum pre-tax contributions from $5,000 to $10,500 in 2021. The children’s
daycare was still closed at the beginning of the year and Aniela’s parents were taking
care of the children so that she could work remotely from home. Because of this
uncertainty, Michal increased his 2021 contributions to $7,000.
As it turned out, the children have returned to daycare and Michal and Aniela expect to
have $12,000 in daycare expenses this year. Since maximum expenses for the credit
increased in 2021, can they figure the credit using the entire $12,000? Michal and
Aniela file a joint return and their combined earned income is about $85,000.
A.
Michal and Aniela are eligible for a child and dependent care credit in addition to the
dependent care benefits (DCBs) that Michal received. However, their maximum workrelated
expenses are reduced by the DCBs.
ARPA changes to the child and dependent care credit for 2021
For tax year 2021 only:
• Maximum work-related expenses increase from $3,000 to $8,000 for one
qualifying child and from $6,000 to $16,000 to two or more qualifying children.
• The maximum credit percentage increases from 35% to 50%.
o The maximum credit percentage phaseout starts when AGI exceeds
$125,000.
o The pre-ARPA credit did not phase out completely but the maximum credit
percentage decreased from 35% starting at AGI of $15,000 down to 20%
starting at AGI of $43,000.
• The credit is refundable.
See the IRS’s recent FAQs on the ARPA changes. The ARPA also increased the
maximum employer-provided dependent care benefits (DCB) from $5,000 to $10,500
for 2021.
Calculating the child and dependent care credit for 2021 after DCBs
To figure Michal’s and Aniela’s child and dependent care credit for 2021, their workrelated
expenses must be reduced by the DCBs that Michal received:

$12,000 work-related expenses
-$ 7,000 DCBs
$ 5,000 maximum work-related expenses for the child and dependent care credit.
Since Michal’s and Aniela’s AGI is less than $125,000, their credit percentage is the
maximum 50%.
$5,000 × 50% = $2,500
If Michal did not receive DCBs, they could have used the full $12,000 work-related
expenses to calculate the credit and their credit would have been $6,000. Or, if Michal
had opted for the maximum pre-tax contribution of $10,500, their credit would be
calculated based only on the remaining $1,500 of eligible expenses and their credit
would have been $750. Although the 2021 credit is more generous, the formula for
calculating the child and dependent care credit when a taxpayer also receives DCBs
has not changed.
The expanded child and dependent care credit and DCB rules expire after 2021 unless
extended.