Navigating the Proposed Child Care Tax Credit Changes
As part of the COVID relief package, changes are being proposed to the Child Care Tax Credit to help families with greater tax breaks. Below is an overview of the proposed changes:
- Claim 35% of child care expenses, up to:
- $3,000 for one child
- $6,000 for two or more children
- Example: If you paid $10k in child care for 1 child, you can claim $3,000. If you paid $5k, you can claim $1,750.
- Example: If you claimed $6k in child care and only owed $4k in taxes, you would NOT get a refund.
Proposed changes (as of 2/17/21)
- Claim 50% of child care expenses, up to:
- $4,000 for one child
- $8,000 for two or more children
- Example: If you paid $10k in child care expenses for 1 child, you can claim $4,000. If you paid $5k in child care expenses, you can claim $2,500.
- Example: If you claimed $8k in child care and you only owed $6k in taxes, you get a $2k refund.
- Emergency basis for 1 year
- Full credit for families making less than $125k
- Partial credit for families making between $125k-$400k
Trying to understand these changes can be confusing, but as a child care agency you can help make this transition easier for your clients. Below is information you can share with them once the packaged has been passed.
What parents can include/claim:
- Amount paid to caregiver
- All agency fees
- Mileage charged to the family by the caregiver or agency
- Any expenses required to be paid to receive child care
What is required to file:
- Form 2441
- Caregiver’s full name, address, EIN or SSN, and amount paid
- For audit purposes, they should have documentation showing amount paid (ie. receipt)
What you can do to prepare:
- Stay informed: Continue to track the progress of the package and if any changes are made to the proposal
- Be proactive: Inform your clients about this change
- Write an email now so you can hit send when it’s passed*
- Provide receipts: Ensure you are issuing receipts for agency fees and caregiver fees as well
- Recommend tax support: For full/part-time nannies, recommend a payroll tax service parents can use
By helping your clients prepare for this change, you can become their trusted advisor for all things child care. And that’s a win for everyone!
*Ensure the final relief package matches the details you’re sending
**All information in this article is as of 2/17/21 and is subject to change