A new tax law takes effect for 2021 that provides big handouts for families with children. The child tax credit is going to $3,000 ($3,600 for those five and under), and half of it will be coming in monthly checks! That is automatic. There is also a significant increase in the child care tax credit. That is what I will be discussing.
The Old Child Care Tax Credit
According to the prior law, you got a 20% credit for the cost of care in preschool and day camp for under age 13. The maximum costs considered were $3,000 for one child and $6,000 for two or more. You could therefore save a maximum of $1,200. ($6,000 x 20% = $1,200). This credit was non-refundable. That means that if your tax liability was $500 and your tax credit was $1,000, your taxes went down to zero but you did not get any money back. Therefore, you only saved a total of $500. The concept is that daycare is a “work expense” to allow woman to go to work.