In response to pandemic-related dependent care challenges, the American Rescue Plan Act (ARPA) added temporary relief to the Child Tax Credit (CTC) program for 2021. The changes were expected to become permanent, but as 2021 ended, the legislation to achieve this did not pass. Now, qualified parents/guardians will be receiving refundable balances due as part of their 2021 tax return. More information on this, along with tax relief changes to Dependent Care Assistance Program (DCAP) for 2022, are discussed below.
Child Tax Credit Updates
Since it was first created in 1997, the Child Tax Credit (CTC) has been applied to annual tax returns. Under ARPA, half of the 2021 anticipated credit was instead issued as monthly payments. Other ARPA adjustments included:
- Increase from $2,000 to $3,000 for children from 6 to 16 years old
- Increase from $3,000 to $3,600 for children under 6 years old
- $3,000 credit for 17-year-olds (previously ineligible)
- Monthly payments sent automatically to eligible parents (no prior action needed)
With the end of the 2021 expansion, the CTC program will revert back to its original design. Tax returns for 2022 (filed in 2023) will include tax credits at $2,000 per child, with 17-year-olds no longer eligible.
Dependent Care Assistance Program Updates
For decades, the Dependent Care Assistance Program (DCAP) has provided tax savings for workers needing to hire others to care for dependents while they are at work or school.
During the pandemic, the Consolidated Appropriations Act (CAA) and ARPA temporarily expanded this relief program. With some exclusions, the annual contribution limit for 2021 increased to $10,500 for a head of household or those married and filing jointly. If married and filing separately, the limit was $5,250. A 12-month grace period (carryover) was activated to prevent employees from losing any DCAP funds they could not use during pandemic lockdowns, and anyone with unused DCAP funds at the end of 2021 could use the extended carryover or grace period into 2022. Also of note, employers need to become versed in changes to the IRS reporting requirements resulting from the DCAP program extensions.
Employees who have started a DCAP benefit account for the first time in 2022 should be aware that annual limits have now reverted to the prior levels. Contributions for heads of households or married couples filing jointly are once again capped at $5,000 annually. For married couples filing separately, the limit is now capped at $2,500.
Benefit rules and regulations continue to change and become more complex, and employers must be timely and accurate in implementing and communicating these changes. Having the assistance of a third-party benefits administrator (TPA) can prove invaluable to keeping your plans compliant and helping educate participants.
DataPath, Inc is a leading provider of cloud-based technology solutions for FSA, HRA, HSA and COBRA account administration.