Important tax provisions in the American Rescue Plan Act of 2021 could affect your tax position. Here’s what you need to know:
Increase in the child and care loan for 2021 only
The new tax law affected taxpayers in several ways. First, it increased the dollar amount of the loan and the amount of eligible child and long-term care expenses. It also changed the exit amount on the loan to allow high earners to take advantage of the loan. Eventually, the new law made the child and care-dependent credit fully reimbursable.
For 2021, the highest credit percentage of qualifying expenses was increased from 35% to 50%. In addition, Eligible Families can claim Eligible Child and Care Expenses up to $ 8,000 for one Eligible Person (up from $ 3,000 in previous years) or $ 16,000 for two or more Eligible People (up from $ 6,000 before 2021). This means that the maximum 50% credit for one loved one’s eligible expenses in 2021 is $ 4,000, or $ 8,000 for two or more loved ones.
When calculating the credit, long-term care benefits provided by the employer, such as those provided via a flexible expenditure account (FSA), must be deducted from the total eligible expenditure.
As before, the more a taxpayer earns, the lower the credit percentage. However, under the new law, more people will qualify for the new 50% Maximum Loan Rate as the Adjusted Gross Income (AGI) level, at which the loan percentage is reduced, will be increased significantly from $ 15,000 to $ 125,000.
For adjusted gross income above $ 125,000, the 50 percent credit percentage will be reduced as income increases and a plateau of 20 percent for taxpayers with an AGI above $ 183,000. The loan percentage will stay at 20 percent until it reaches $ 400,000 and then it will settle past that level. It is not available to taxpayers with an AGI greater than $ 438,000.
It is also important that the credit will be fully refunded for the first time in 2021. As such, an eligible family can receive it even if they don’t owe federal income tax.
Workers can put more aside in a dependent FSA
For 2021, the maximum amount of tax-exempt employer long-term care has increased from $ 5,000 to $ 10,500. An employee can set aside $ 10,500 in a FSA for dependent care if their employer has one instead of the normal $ 5,000.
Employees can only do this if their employer adopts this change. Interested workers should contact their employer for details.
Childless EITC extended for 2021
Only for 2021 will more childless workers and couples be eligible for the Earned Income Tax Credit (EITC), a fully refundable tax break that helps many low- and middle-income workers and working families. The maximum credit for these taxpayers has almost tripled and is now available to both younger employees and senior citizens for the first time.
In 2021, the maximum EITC for individuals with no dependents is $ 1,502, down from $ 538 in 2020. It is available to applicants with an AGI below $ 27,380 in 2021 and can be requested by eligible workers who are at least 19 years old. Full-time students under the age of 24 do not qualify. In the past, the EITC for non-dependents was only available to people aged 25-64.
Another change is open to both childless workers and families with dependents. For 2021, they can calculate the EITC based on their 2019 income as long as it was higher than their 2021 income. In some cases, this option will give them higher credit.
Changes to expand the EITC for 2021 and future years
Changes to expand the EITC for 2021 and future years include:
Singles and couples – People with social security numbers can claim the credit even if their children do not have SSNs. In that case, they would get the smaller loan available to childless workers. In the past, these filers did not qualify for credit.
Blue-collar workers and working families – who also have investment income can receive the loan. The capital income limit will be raised to $ 10,000 starting in 2021. After 2021, the limit of $ 10,000 is inflation-indexed. The current limit is $ 3,650.
Married but separated spouses – May choose to be treated as unmarried for EITC purposes. The prerequisite for crediting is that the spouse applying for the loan cannot file an application together with the other spouse, is not allowed to have the same main residence as the other spouse for at least six months a year and an eligible child lives with him for more than half of the year .
Extended child tax credit for 2021 only
The new law increases the amount of child tax deduction, makes it available for 17 year old dependents, makes it fully refundable, and allows families to receive up to half in advance during the last half of the year 2021. In addition, families can get the credit even if they have little or no income from a job, business or other source.
Prior to the 2021 tax year, credit is up to $ 2,000 per Eligible Child. The new law increases it up to $ 3,000 per child for dependents ages 6-17 and to $ 3,600 for dependents under five.
The maximum credit is available to taxpayers with a modified AGI of:
- $ 75,000 or less for singles,
- $ 112,500 or less for Heads of Households and
- $ 150,000 or less for married couples filing a joint declaration and qualified widows and widowers.
Above this income limit, the additional amount over the original $ 2,000 balance – either $ 1,000 or $ 1,600 per child – will be reduced by $ 50 per $ 1,000 of modified AGI. In addition, the 2021 credit is fully refundable. Prior to this year, the reimbursable portion was capped at $ 1,400 per child.
Prepayments for Child Tax Credit
From July through December 2021, up to half of the loan will be paid out by the Treasury Department and the IRS to eligible families. These prepayments are estimated based on their 2020 return or, if not available, their 2019 return.
It is for this reason that the IRS urges families to file their 2020 declarations as soon as possible – including many low and middle income families who do not normally file declarations. Often these families are entitled to an economic impact payment or tax advantages such as the EITC. This year, taxpayers have until May 17, 2021 to submit a return.
To speed up the delivery of a refund, make sure you submit electronically and choose direct transfer. This will also ensure rapid delivery of child tax credit prepayments to eligible taxpayers later this year.
Eligible families can refuse to receive the advance payments in the next few weeks. Similarly, families can use the IRS Child Tax Credit Update Portal to notify the Treasury Department and the IRS of changes in their income, enrollment status, or the number of qualifying children.
above Juanita Bauer, CPA
Juanita Farmer writes the Financial Cents blog. Juanita Bauer. CPA is a managing partner of JD Farmer & Associates, LLC, an accounting firm based in Germantown, Maryland. Ms. Farmer has worked in accounting and taxation for over 27 years.