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Bigger Tax Credit for Summer Child Care

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Your clients can now pocket a credit for 2021 that’s more than six times the maximum credit they collected in 2020 and still claim the credit for a wide range of expenses, including summer day camp.

Jul 26th 2021
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If your clients are paying a facility or person to watch their kids this summer, they may be in line for the dependent care credit, commonly called the “child care credit.” What’s more, the new tax law enacted earlier this year—the American Rescue Plan Act (ARPA)—increases the tax benefits.

But the news isn’t good for all taxpayers. For folks with income in the upper stratosphere, the credit is reduced to the point where it is no longer available.

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Let’s review the basics. To qualify for the credit, clients must incur expenses to care for a child under age 13 or, in other instances, for a dependent relative (that’s why it’s often referred to as the child care credit). The list of qualified expenses is a long one ranging from daycare centers to babysitters to summer day camp—even a specialty camp for athletics or other pursuits may qualify (but not any overnight camps).  

Prior to the ARPA, the maximum credit percentage was 35 percent, but it was gradually reduced to 20 percent for most moderate-to-upper income families. This nonrefundable credit was available for the first $3,000 of qualified expenses for caring for one child or $6,000 for two or more children. Thus, your maximum credit was generally either $600 or $1,200, respectively.

Usually, if one spouse did not have any earned income, the couple wasn’t eligible for the credit. However, a credit could still be claimed if one spouse was a full-time student or disabled. In that case, the spouse was considered to have earnings of $250 a month for one child or $500 per month for two or more children.

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