Child And Dependent Care Tax Credit For 2021 – Applicable Percentage Changes
It’s one thing to increase the maximum potential Child and Dependent Care Tax Credit (for 2021), but it’s another to enable taxpayers to actually ‘see’ those increased credits on their 2021 tax returns. Notably, the actual Child and Dependent Care Tax Credit to which a taxpayer is entitled is calculated by multiplying the amount of the taxpayer’s eligible expenses (such as daycare) with what is known as their “Applicable Percentage”. The ‘regular’ (i.e., pre-2021) maximum Applicable Percentage is 35%. That percentage, however, is quickly reduced to as little as 20%, phasing down as the taxpayer’s AGI exceeds $15,000 (regardless of filing status). More specifically, for every $2,000 amount (or portion thereof) a taxpayer’s AGI exceeds the $15,000 threshold, the Applicable Percentage is reduced by 1% (to as low as the 20% ‘floor’ Applicable Percentage amount). Accordingly, by the time a taxpayer has $45,000 in income, they have reached the 20% Applicable Percentage floor. However, under the American Rescue Plan, the maximum Applicable Percentage is increased to 50%. Furthermore, the 50% Applicable Percentage does not begin to be phased out until the taxpayer’s AGI exceeds $125,000 (regardless of filing status)! As a result, many more taxpayers will be able to receive the maximum Child and Dependent Care Tax Credit in 2021. Which means that under the American Rescue Plan, a taxpayer with AGI under $125,000 would have an Applicable Percentage of 50%. But as a taxpayer’s AGI exceeds the $125,000 threshold, the ‘regular’ phaseout formula applies. As before, the ‘regular’ phaseout formula reduces the Applicable Percentage by 1% for every $2,000 (or portion thereof) the taxpayer is over the phaseout threshold until the Applicable Percentage equals 20%. Accordingly, as a taxpayer’s AGI increases from $125,000 to $185,000 under the American Rescue Plan, their Applicable Percentage phases out from 50% to 20%. […]