Frequently Asked Questions on Tax Credits from the American Rescue Plan

The IRS released frequently asked questions regarding claiming credits under the American Rescue Plan. The FAQs provide details on the child and dependent care credit and the paid sick and family leave credit.

Child and dependent care credit

tax faqsFor 2021, eligible taxpayers can claim qualifying work-related expenses up to:

  • $8,000 for one qualifying person, up from $3,000 in prior years, or
  • $16,000 for two or more qualifying persons, up from $6,000 in prior years.

Taxpayers are also required to have earnings; the amount of qualifying work-related expenses claimed cannot exceed the taxpayer’s earnings.

Taxpayers with the maximum amount of qualifying work-related expenses would receive a credit of $4,000 for one qualifying person, or $8,000 for two or more qualifying persons. When calculating the credit, a taxpayer must subtract employer-provided dependent care benefits, such as those provided through a flexible spending account, from total work-related expenses.

A qualifying person generally is a dependent under the age of 13, or a dependent of any age or spouse who is incapable of self-care and who lives with the taxpayer for more than half of the year.

The more a taxpayer earns, the lower the percentage of work-related expenses that are considered in determining the credit. The credit rate starts to be reduced for adjusted gross income above $125,000. Taxpayers with adjusted gross income over $438,000 are not eligible for the credit.

For the first time, the credit is fully refundable in 2021. To claim the credit for 2021, taxpayers will need to complete Form 2441, Child and Dependent Care Expenses, and include the form when filing their tax returns in 2022.

View the IRS FAQs on child and dependent care credits.

Paid sick and family leave credits

The paid sick and family leave credits reimburse eligible employers for the cost of providing paid sick and family leave to their employees for reasons related to COVID-19, including leave taken by employees to receive or recover from COVID-19 vaccinations. Self-employed individuals are eligible for similar tax credits.

The American Rescue Plan amends and extends these credits, and provides that leave wages paid to an employee who is seeking or awaiting the results of a test for, or diagnosis of, COVID-19, or is obtaining immunizations related to COVID-19 or recovering from immunization, are leave wages that can be eligible for the credits. Additionally, under the ARP, eligible employers may now claim the credit for paid family leave wages for all the same reasons that they can claim the credit for paid sick leave wages.

Eligible employers, including businesses and tax-exempt organizations with fewer than 500 employees and certain governmental employers, may claim tax credits for qualified leave wages and certain other wage-related expenses (such as health plan expenses and certain collectively bargained benefits) paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021.

The aggregate cap on qualified sick leave wages is two weeks (up to a maximum of 80 hours), and this aggregate cap reset with respect to leave taken by employees beginning on April 1, 2021. The aggregate cap on qualified family leave wages is $12,000.

The paid leave credits under the American Rescue Plan are tax credits against the employer’s share of Medicare tax. The tax credits are refundable, which means that the employer is entitled to payment of the full amount of the credits to the extent it exceeds the employer’s share of Medicare tax.

View the IRS FAQs on paid sick and family leave credits.

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