Starting for Tax Year 2021 the Internal Revenue Service has changed how the Child and Dependent Care Credit is calculated and the impact of this change on your return.

The new calculation for the credit is that for one child you receive a 50% credit of the first $8,000 spent on child care.  For two or more children the credit you will receive is a 50% credit of the first $16,000 spent on child care.

So now let’s look how this new calculation impacts your tax return….

Mr. and Mrs. Smith have two children in childcare, their cost is $9,000 and their taxable income is $12,000.  They will have a tax liability of $1,203:

Old Law:    Child care for two or more children is limited to $6,000 of expenses and their income would qualify them for a NON-Refundable credit of 23% credit of the $6,000 for a total credit of $1,380.   Since the credit is more than their tax liability their tax is reduced to Zero and they end up losing the remaining $377.

New Law:   Child care credit for two or more children is limited to $16,000 of expenses, so their Child Care credit is a 50% refundable credit of $4,500.  Not counting any other credits the Smiths would have a refund of $3,297.

So this means that the Smiths benefited by $3,297 that is now refunded to them with this new change in how Child Care is calculated on the return.


Now, if you’re a taxpayer who uses a private day care provider who does not supply you with their social security number you may want to rethink whether it is worth it or not to obtain the social security number of your provider or switch providers because you could be leaving a lot of money on the table for the Internal Revenue Service to keep.

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