American Rescue Plan: Child and Dependent Care Credit with student spouse

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wineandplaya
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Joined: Fri Sep 14, 2018 9:42 am

American Rescue Plan: Child and Dependent Care Credit with student spouse

Post by wineandplaya »

Thanks to the recently passed American Rescue Plan, the amount that can be claimed for dependent care expenses increases significantly for 2021. My wife and I expect to have about $16,000 in daycare expenses this year for our daughter. We are also expecting a second child this year so under the bill, we will be able to claim the full $16,000.

My understanding is that the amount of expenses you can claim is limited by the earned income of the lower earning spouse. Now, my wife is in graduate school, and her earned income is reduced to zero thanks to the 403(b) and 457(b) offered by the university. For full-time students, IRS allows you to count $6,000 as earned income (for two or more children), which would normally be enough to max out on the Child and Dependent Care Credit. But if the limit this year is increased to up to $16k, will we lose out on the full credit unless we can find another $10k of income for my wife?

We can increase my wife's income by electing Roth for her 403(b) or 457(b), but we prefer not to (we plan to move abroad and there is little hope that foreign countries will honor tax-free withdrawals for Roth accounts). I expect my income, from self-employment, to be around $300k this year. We max out on our backdoor Roths and I max out on my solo 401(k). We should be in the 22 % tax bracket and the Child and Dependent Care Credit is 20 % of expenses for us.
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