The US Internal Revenue Service (IRS) has issued two sets of frequently asked questions (FAQs) to provide guidance on the child and dependent care credit and the paid sick and family leave credit, as enhanced by the American Rescue Plan Act of 2021 (ARP). The IRS has also issued an accompanying News Release (IR-2021-128), dated 11 June 2021.
The child and dependent care tax credit is allowed for a percentage of work-related expenses that a taxpayer incurs for the care of qualifying persons to enable the taxpayer to work or look for work.
For 2021, the ARP:
- increases the maximum amount of work-related expenses for qualifying care that may be taken into account in calculating the credit;
- increases the maximum percentage of those expenses for which the credit may be taken;
- modifies how the credit is reduced for higher earners; and
- makes it refundable.
The paid sick and family leave credit reimburses eligible employers for the cost of providing paid sick and family leave to their employees for reasons related to COVID-19. Self-employed individuals are eligible for similar tax credits.
The ARP:
- amends and extends the credit;
- treats 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, as leave wages that can be eligible for the credit; and
- permits eligible employers to claim the credit for paid family leave wages for all the same reasons that they can claim the credit for paid sick leave wages.
The two sets of FAQs, both of which were last reviewed or updated on 11 June 2021, provide information on eligibility, computing the credit amounts, and how to claim the credits.
Note: The ARP was enacted on 11 March 2021 to assist families and businesses, as well as state and local governments, with the fallout of the COVID-19 pandemic and recovery underway.