How Will the Child Care Deduction Affect Your Taxes?

Nashua, NH Resident Looks for Answers

Child tax credit payments began over the summer and will continue through the year for qualifying families.  When you go to file your 2021 taxes, you will only be eligible for half of the normal child care credit because the other half was already received throughout the second half of 2021.  Since the deduction is based off of your 2020 income, a significant increase in your income may leave you owing some of the money back to the IRS if it exceeds the thresholds set. 

A Nashua resident had begun receiving monthly checks for the child care deduction.  Concerned, she contacted Merrimack Tax Associates to inquire how this would affect her tax filings for 2021.

Expect a Lower Child Care Credit at Tax Filing Time

The child care credit was increased for 2021.  However, with half of the amount already being paid through the latter six months of the year, you can expect to receive half of the normal deduction when it comes time to file your taxes.  This may surprise some families and is well worth planning ahead for a lower return.

Income Increases May Require You to Pay Back the Child Care Deduction

The income limits for the childcare deduction were set at $75,000 for single filers and $150,000 for married couples.  Income exceeding this amount is ineligible for the child care deduction.  To determine who would receive this monthly stimulus, the IRS looked at 2020 tax returns.  If your income went above these limits in 2021 you will have to repay the money received, as you were no longer eligible based on your income.  In this scenario, you can change your filing status to file separately from your spouse.  This may reduce your income level below the cut-off, while still being tax advantageous enough.

Thanks to Merrimack Tax Associates, this Nashua resident has the peace of mind now knowing how this money she has received will affect her taxes when she goes to file for 2021.