6/11/2021
Candace J. Dixon
Both the Child and Dependent Care Credit and the Paid Sick and Family Leave Credits were enhanced under the American Rescue Plan, which was enacted in March to help families and small businesses with relief during the COVID-19 pandemic and recovery.
The Internal Revenue Service released FAQs to help families and employers with these credits available to them that provide information on eligibility, computing the credit amounts, how to claim these tax benefits, and other issues.
Child and Dependent Care Credit For 2021, the ARP increased the maximum amount of work-related expenses for qualifying care that may be taken used when calculating the credit, and it increased the maximum percentage of those expenses for which the credit may be taken. It also modified how the credit is reduced for higher earners, and made it refundable.
For 2021, eligible taxpayers can claim qualifying work-related expenses up to:
$8,000 for one qualifying person (up from $3,000 in prior years)
$16,000 for two or more qualifying people (up from $6,000 in prior years)
When combined with the increase to 50% in the maximum credit rate, people with the maximum amount of qualifying work-related expenses would receive a credit of $4,000 for one qualifying person, or $8,000 for two or more qualifying people.
While the percentage of work-related expenses that are taken into account in determining the credit are lowered the more you earn, more people will qualify for the new maximum 50% credit rate under the new law because it increased the adjusted gross income level at which the credit rate starts to be reduced to $125,000. Above $125,000, the 50% credit percentage goes down as income rises. People with adjusted gross income over $438,000 are not eligible for the credit.
You are required to have earnings, and the amount of qualifying work-related expenses claimed can't exceed the earnings. When calculating the credit, you have to subtract employer-provided dependent care benefits, such as those provided through a flexible spending account, from your total work-related expenses.
Work-related expenses are amounts you (or your spouse if you file a joint tax return) pay for the care of a qualifying person, or for household services if at least part of the services is for the care of the qualifying person, so that you can work or look for work. Your work can be full or part-time, and it can be for others or in your own business. It also includes actively looking for work, but you can't take the credit if you don’t find a job and have no earned income for the year, you can’t take this credit.
A qualifying person is generally a dependent under the age of 13, or a dependent of any age, or a spouse who is incapable of self-care and who lives with the taxpayer for more than half of the year.
The credit is fully refundable for the first time in 2021, meaning that people who are otherwise eligible for it can receive it even if they don't owe any federal income tax. Taxpayers (or the taxpayer's spouse if they are filing a joint return) must live in the United States for more than half the year to be eligible. (Special rules apply to military personnel stationed outside of the United States.)
You need to complete Form 2441, Child and Dependent Care Expenses and include it when filing your tax returns in 2022 to claim the credit for 2021. People claiming the credit have to provide a valid taxpayer identification number (TIN) for each qualifying person when they complete Form 2441, which is typically their Social Security number. They also have to provide the names, addresses, and TINS to identify all individuals and/or organizations who provided care for the qualifying person.
See the complete IRS FAQs here:
Child and Dependent Care Tax Credit FAQs for Claiming the Credit
Child and Dependent Care Tax Credit FAQs for Work-related Expenses
Paid Sick and Family Leave Credits
Under the American Rescue Plan, eligible employers with less than 500 employees can claim tax credits to be reimbursed for qualified leave wages and other wage-related expenses, such as health plan expenses, that are paid with regards to leave taken by employees beginning on April 1, 2021, through September 30, 2021 for COVID-19 related reasons, including leave taken to receive or recover from COVID-19 vaccinations. Self-employed individuals are eligible for similar tax credits.
The paid sick and family leave tax credits in the American Rescue Plan are similar to the Families First Coronavirus Response Act (FFCRA), extended and amended by the COVID-related Tax Relief Act of 2020, where employers could receive tax credits for providing paid leave to employees that met the requirements of the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act (as added by the FFCRA).
In addition to amending and extending those credits, the American Rescue Plan also includes leave wages paid to employees who are getting or waiting for the results of a test for, or a diagnosis of, COVID-19. Leave taken by employees for getting or recovering from COVID-19 vaccines are also eligible for the credits.
Under the ARP, eligible employers can now claim the credit for paid family leave wages for all the same reasons that they can claim the credit for paid sick leave wages.
The ARP keeps the daily wage thresholds from the FFCRA. The aggregate cap on qualified sick leave wages is two weeks, up to a maximum of 80 hours, and the cap reset with regards to leave taken by employees beginning on April 1, 2021.
The aggregate cap on qualified family leave wages increased to $12,000 (up from $10,000), and it reset with regards to leave taken by employees beginning on April 1, 2021.
The paid leave credits under the ARP are tax credits against the employer's share of Medicare tax. The tax credits are refundable, which means employers are entitled to payment of the full amount of the credits to the extent it exceeds the their share of Medicare tax.
In anticipation of the credits to be claimed on their federal employment tax returns, employers can keep the federal employment taxes they would have deposited otherwise. This includes federal income tax withheld from employees; the employees' share of social security and Medicare taxes; and the employer's share of social security and Medicare taxes with regards to all employees up to the amount of the credit for which they are eligible.
If they don't have enough federal employment taxes on deposit to cover the amount of the credits they expect to received, employers can request an advance of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
See the complete IRS FAQs here:
Self-employed individuals can claim similar credits on their Form 1040 Individual Income Tax Return. More information can be found on the Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: Specific Provisions Related to Self-Employed Individuals FAQs page.
Resources:
Child and Dependent Care Tax Credit FAQs
Coronavirus Relief and Economic Impact Payments: FAQs