The Internal Revenue Service is providing information about the child and dependent care credit and the paid sick and family leave credit, which were expanded under the American Rescue Plan.
The IRS posted two separate sets of frequently asked questions Friday to help
The guidance provides helpful information to both taxpayers and tax professionals about how the tax credits have been expanded for this year. The Biden administration has also proposed an American Families Plan that would extend the expanded child and childcare tax credits beyond this year.
Similar proposals were included in the administration's budget proposal for the next fiscal year. "This proposal directs nearly $80 billion to the IRS over a decade to hire new specialized enforcement staff, modernize antiquated information technology, and invest in meaningful taxpayer service — including the implementation of the newly expanded credits including newly expanded child tax credit and child and dependent care tax credits aimed at providing support to American families," said IRS Commissioner Charles Rettig during a Senate Finance Committee hearing on Tuesday.
Both the tax credits aim to help families and small businesses deal with the economic fallout of the COVID-19 pandemic. Even though the economy appears to be rebounding strongly this year, the tax credits are still available for this year. The two sets of FAQs offer information on eligibility, figuring the credit amounts, and how to claim the tax benefits.
Child and dependent care credit
For 2021, the law increased the maximum amount of work-related expenses for qualifying care that can be taken into account in calculating the credit. It also increased the maximum percentage of those expenses for which the credit can be taken, modified how the credit is decreased for higher earners, and made the credit 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; or,
- $16,000 for two or more qualifying persons, up from $6,000 in prior years.
Taxpayers are also required to have earnings; the amount of qualifying work-related expenses claimed cannot exceed the taxpayer’s earnings.
Combined with the increase to 50% in the maximum credit rate, taxpayers who have 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 persons. When calculating the credit, a taxpayer needs to subtract employer-provided dependent care benefits, such as those provided through a flexible spending account, from total work-related expenses.
A qualifying person generally is a dependent under the age of 13, or a dependent of any age or spouse who is incapable of self-care and who lives with the taxpayer for more than half of the year.
As in previous years, the more a taxpayer earns, the lower the percentage of work-related expenses that are used to figure the credit. But under the new law, more taxpayers will qualify for the new maximum 50% credit rate, as the rescue plan increased to $125,000 the adjusted gross income level at which the credit rate begins to be reduced. Above $125,000, the 50% credit percentage decreases as income rises. Taxpayers with adjusted gross income over $438,000 are not eligible for the credit.
The credit is fully refundable for the first time in 2021. That means an eligible taxpayer can receive it, even if they don’t owe any federal income taxes. To be eligible for the refundable credit, a taxpayer (or the taxpayer’s spouse if filing a joint return) needs to live in the U.S. for more than half the year. However, special rules apply to military personnel stationed outside of the U.S.
To claim the credit for 2021, taxpayers have to complete Form 2441, “Child and Dependent Care Expenses,” and include the form when filing their tax returns in 2022. In completing the form to claim the 2021 credit, those claiming the credit will need to provide a valid taxpayer identification number (TIN) for each qualifying person. Typically, that’s the Social Security number for the qualifying person. For more information about completing the form and claiming the credit, see the instructions to Form 2441. In addition, those claiming the credit are required to identify all persons or organizations that provided care for the qualifying person. This requires providing the care provider’s name, address, and TIN.
Paid sick and family leave credits
The paid sick and family leave credits reimburse eligible employers for the cost of providing paid sick and family leave to their employees for reasons related to COVID-19, including leave taken by employees 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 under the American Rescue Plan are similar to those put in place by the Families First Coronavirus Response Act, as it was extended and amended by the COVID-related Tax Relief Act of 2020, under which certain employers were able to 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 (which were included in the FFCRA). The ARP amends and extends these credits, and says that leave wages paid to an employee who’s seeking or awaiting the results of a test for, or diagnosis of, COVID-19, or is obtaining immunizations related to COVID-19 or recovering from immunization, are leave wages that can be eligible for the credits. In addition, 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 FAQs include information on how eligible employers can claim the paid sick and family leave credits, such as how to file for and compute the applicable credit amounts, and how to receive advance payments for and refunds of the credits. Under the ARP, eligible employers, including businesses and tax-exempt organizations with under 500 employees and certain governmental employers, can claim tax credits for qualified leave wages and certain other wage-related expenses (such as health plan expenses and certain collectively bargained benefits) paid with respect to leave taken by employees beginning on April 1, 2021, through Sept. 30, 2021.
The ARP maintains the daily wage thresholds that existed for these credits under the FFCRA. The aggregate cap on qualified sick leave wages stays at two weeks (up to 80 hours), and this aggregate cap has been reset for leave taken by employees starting on April 1, 2021. The aggregate cap on qualified family leave wages has grown to $12,000 from $10,000, and this aggregate cap has been reset for leave taken by employees starting 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, so employers are entitled to payment of the full amount of the credits to the extent it exceeds the employer's share of Medicare tax.
In anticipation of the credits to be claimed on the applicable federal employment tax return, eligible employers can hold onto the federal employment taxes that they otherwise would have deposited, including 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 respect to all employees up to the amount of the credit for which they are eligible. If the eligible employer doesn’t have enough federal employment taxes on deposit to cover the amount of the anticipated credits, the eligible employer may request an advance of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Self-employed individuals can claim comparable credits on the Form 1040, U.S. Individual Income Tax Return.
More information on tax provisions of the ARP is available
