Raising children is expensive.
How expensive is it in Texas?
In Texas, parents paid $777 a month or $9,324 annually, for infant care and $589 a month, or $7,062 a year, for childcare, according to the Economic Policy Institute.
Compare that to in-state tuition for a four-year public college, and you will find that it is 6.8% MORE EXPENSIVE.
Texas is one of the thirty-three states and the District of Columbia where daycare is more expensive than college.
The America Rescue Plan passed by Congress during the pandemic created some significant changes to the dependent care tax breaks for 2021, and they can save you money.
Six Ways to Save
The dependent care flexible spending account
The expense limit for this tax break more than doubled from $5,000 per family per year to $10,500 per family per year.
The change happened in early 2021 after many families had already enrolled in their company’s cafeteria plan; check in with your HR department and see the limit for your company and how you can make an adjustment.
For smaller businesses, this is a benefit that you need to consider for yourself and your employees.
The Child and Dependent Care Tax Credit (CDCTC)
The expense limit for this tax break increased from $3,000 per dependent (maximum of $6,000) to $8,000 per dependent (max of $16,000).
The CDCTC changes for 2021 also increased the credit percentage. Most families were limited to a 20% tax credit based on AGI in prior years. For 2021, the tax credit percentage starts at 50% for those with AGI of $125,000 or less and then slides slowly down to 20% for those earning up to $400,000, and it doesn’t phase out until $438,000 in AGI.
And finally, this credit is refundable for 2021.
Combining dependent care FSA and CDCTC
For the 2021 tax year, more families than usual will be able to use a combination of these two tax breaks.
For instance, let’s take a family that contributed $5,000 into their workplace-dependent care FSA. If they had one child and total expenses of, say, $17,000, they would be able to itemize up to $3,000 on Form 2441 ($8,000 cap minus $5,000 FSA contribution = $3,000 remaining expenses).
If they had two or more dependents, the family would be able to itemize up to $11,000 on Form 2441 ($16,000 cap minus $5,000 FSA contribution = $11,000 remaining expenses).
Eligibility
As in previous years, the child receiving care must be your dependent and be under the age of 13 or mentally or physically unable to care for themselves.
Additionally, both spouses must pass the work-related test, meaning the care is needed so they can work, look for work or be full-time students.
Qualified expenses
Daycare centers, day camps, wages paid to a caregiver, taxes on the wages paid to a caregiver, and fees related to searching for a caregiver are all qualified expenses.
In 2021, qualifying expenses expanded to include “household services” (i.e., housekeepers) if at least part of the services involved caring for a qualifying person.
Reporting expenses and wages
Form 2441 requires that expenses be associated with an EIN in the case of the costs paid to a company (i.e., daycare center) or an SSN in the case of wages paid to an individual caregiver.
Suppose wages were paid to an individual caregiver. In that case, the family will need to report those wages to their state and the IRS and pay the corresponding employer taxes (i.e., federal and state unemployment, Social Security, Medicare).
Unfortunately, many families and business owners are unaware of these changes or how to make tax-savvy elections with their dependent care expenses.
WE CAN HELP
The Tannery Company team knows how to assist you in making the best choices in your dependent care dollars and can assist business owners in establishing the FSA accounts for their employees.
Michael Tannery CPA CDFA® AIF® ● CEO
Registered Principal | Tannery & Company
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The opinions expressed in this material are for general informational purposes only and are not a substitute for professional advice. Individual circumstances do vary.
