What the American Rescue Plan Means for Your 2021 Taxes
What the American Rescue Plan Means for Your 2021 Taxes
Many Americans will see a boost to their bottom line in 2021 and 2022 - thanks to changes the American Rescue Plan made to a handful of tax credits.
The $1.9 trillion COVID-19 relief package was signed into law in March 2021 and expanded the child tax credit, the child and dependent care credit, and the earned income tax credit.
Child Tax Credit Changes
Several notable changes have been made to the child tax credit, but the changes are temporary and apply to 2021 only. For example, the credit amount has been increased and is now fully refundable, meaning that an eligible taxpayer can receive it, even if they owed no federal income tax.
Prior to 2021, the child tax credit was worth up to $2,000 per qualifying child, with the refundable portion limited to $1,400. Under the American Rescue Plan, the credit is worth up to $3,000 per child ages 6 through 17 at the end of 2021 and $3,600 per child ages 5 and under.
The size of the benefit gradually decreases for single filers earning more than $75,000 per year, heads of households earning more than $112,500, and couples who are married filing jointly earning more than $150,000.
Since the American Rescue Plan allows for advance payment of the child tax credit, many taxpayers will start receiving monthly payments up to $300 per child starting on July 15, 2021. The monthly advance payments will continue through 2021 and will be estimated from 2020 tax returns, or from 2019 returns if 2020 information is not available.
Child and Dependent Care Credit
Changes made to the child and dependent care credit apply to 2021 only and this marks the first time that the credit is fully refundable. Qualifying individuals for this credit include dependents under the age of 13, or a dependent of any age or spouse who is incapable of self-care and who lives with the taxpayer for more than half of the year.
The American Rescue Plan increases the amount of the credit and eligible expenses for child and dependent care with the top credit percentage of qualifying expenses increased from 35% to 50%.
Eligible taxpayers can now claim qualifying employment-related expenses up to $8,000 per individual (up from $3,000) and $16,000 for two or more individuals (up from $6,000). This means that maximum credit for 2021 of 50% is increased to $4,000 per individual and $8,000 for two or more individuals. When figuring the credit, a taxpayer must subtract employer-provided dependent care benefits.
More households will be able to take advantage of this tax credit because the income limit at which the percentage starts to phase out has been raised to $125,000. As income rises, the credit percentage goes down and is completely phased out for any taxpayer with adjusted gross income over $438,000.
Earned Income Tax Credit (EITC)
First introduced in 1975, the EITC is a refundable credit with the credit amount based on household income and number of children. Changes under the American Rescue Plan will go largely to workers who do not claim a qualifying child. For this group, the maximum benefit has been tripled to $1,502 from $543 for 2021 only. In addition, the minimum age to claim EITC has been reduced from 25 to 19 and the upper age limit (previously 65) has been eliminated. Earned income must fall below $21,430 for individuals and $27,380 for married filing jointly.
Another change for 2021 only allows taxpayers to figure the EITC using their 2019 earned income if it was higher than their 2021 earned income – giving some taxpayers a larger credit. A permanent change has been made to the limit on investment income, allowing more families to receive the EITC. Starting in 2021, the amount of investment income taxpayers can receive and still be eligible for the EITC increases from $3,650 to $10,000.
Additional Information
For a complete overview of these tax provisions in the American Rescue Plan and how they impact families and individuals, go to the IRS website at: https://www.irs.gov/newsroom/irs-offers-overview-of-tax-provisions-in-american-rescue-plan-retroactive-tax-benefits-help-many-people-now-preparing-2020-returns.
With some members of Congress pushing to make the 2021 tax credit expansions permanent, this may not be the final word on child tax credits and the EITC. Continue to check herbein.com for updates or reach out to your Herbein advisor at info@herbein.com.
