Qualifying families can get up to $8,000 during 2021 tax season

Taxpayers with children are getting a bigger break on their 2021 taxes as part of the American Rescue Plan Act.

The tax credits related to child care expenses for qualifying dependents will be temporarily increased during the 2021 tax season only.

According to the Internal Revenue Service, eligible families will be able to claim child care expenses of up to $16,000 for two or more qualifying dependents and $8,000 for one qualifying dependent.

However, only a maximum of 50% of a qualifying dependent’s expenses will be credited.

What does that mean?

If you have two qualifying dependents and claim $16,000 or more in childcare expenses in 2020, you could qualify for up to $8,000 in tax credits.

So, let’s assume you owe $4,000 on your taxes next year. If you meet the criteria for the full tax credit with two dependents - you would no longer owe taxes but be given a $4,000 tax return instead.

According to the IRS, employer-provided dependent care benefits like flexible spending accounts must be subtracted from taxpayer’s total eligible childcare expenses.

As with the stimulus checks sent out by the government over the past year, the credit will start to phase out for households with higher incomes.

For the upcoming tax season, the adjusted gross income level at which the credit percentage is reduced has been raised substantially from $15,000 to $125,000, the IRS reported. That means more money for many taxpayers.

For taxpayers who make more than $125,000, the credit percentage is reduced gradually from 50% down to 20% for those who earn $183,000 to $400,000. Taxpayers whose adjusted gross income is higher than $438,000 will not qualify.

To put these numbers into perspective:

• The $8,000 for one qualifying dependent is up from $3,000 in previous years
• The $16,000 for two or more qualifying dependents is up from $6,000 in previous years

The 2021 tax season will be the first time the credit is fully refundable - meaning even if an eligible family does not owe federal income tax, they will still qualify for the credit.

Related:

• Here’s what you need to know about those child tax credit payments
• Stimulus payments sent to dead people must be returned, IRS says