“The IRS will make advance payments of the 2021 Child tax credit from July through December to all eligible taxpayers. Eligible taxpayers do not need to do anything other than file their 2020 tax returns to receive these payments.”
On March 10, 2021, Congress passed the American Rescue Plan Act of 2021, which provides further relief to Americans in response to the ongoing Coronavirus Pandemic and attempts to reduce the child poverty rate. With this act comes several changes in tax credits, most importantly the child tax credit.
Let’s look at these changes and how they may affect your 2021 tax return:
Child Tax Credit
The American Rescue Plan Act (ARPA) increases the Child Tax Credit from $2,000 per child to $3,000 per child ($3,600 for a child under age 6). Additionally, it makes 17-year-olds qualifying children for the year.
The increased Child Tax Credit will be fully refundable, meaning taxpayers will benefit from the credit regardless of whether they have earned income or owe any income taxes. The 2021 Child Tax Credit will be phased out based on the following Adjusted Gross Income (AGI) limits: $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers. For every $1,000 above these thresholds, the credit will be reduced by $50.
The IRS will make advance payments of the 2021 Child Tax Credit from July through December to all eligible taxpayers. Eligible taxpayers do not need to do anything other than file their 2020 tax returns to receive these payments.
The total of the advanced payments will be 50% of the total Child Tax Credit (estimated based on the latest filed return) (See below for a breakdown of the payments). If the taxpayer’s income changes on their 2021 tax return so that the credit is phased out, they will have to pay back the excess advance credit they received.
Eligible taxpayers who do not wish to receive these payments or expect that the credit will be phased out may opt out of these payments through a portal on the IRS website.
|Month||Maximum amount (ages 5 and under)||Maximum amount (ages 6-17)|
|$ 300||$ 250|
|August 2021||$ 300||$ 250|
|September 2021||$ 300||$ 250|
|October 2021||$ 300||$ 250|
|November 2021||$ 300||$ 250|
|December 2021||$ 300||$ 250|
|2021 Tax Return Tax Credit||$ 1,800||$ 1,500|
*All the above changes to the Child Tax Credit are only for the tax year 2021.
Additional Child Care Tax Credit
The tax credit available for qualified childcare expenses has been increased as well. Similar to the Child Tax Credit, the childcare expenses are now refundable. They have also been expanded to equal half of the taxpayer’s spending on childcare for children 13 years and under, limited to $4,000 for one child or $8,000 for two or more children.
The phase-out for the Child Care Tax Credit will also be updated. Eligible taxpayers with an AGI of $125,000 or less will get a credit worth 50% of their child care expenses. The percentage is gradually reduced from 50% to 20% for taxpayers with an AGI between $125,00 and $185,000. Those with an AGI between $185,000 and $400,000 will be able to deduct 20% of childcare expenses, while for taxpayers with an AGI between $400,000 and $440,000, the credit is gradually reduced again from 20% to 0%. For taxpayers with an AGI above $440,000 no tax credit will be available.
Earned Income Tax Credit
The Earned Income Tax Credit will increase by as much as $1,000 from prior years. This will help benefit cashiers, food service workers, and other frontline employees who have worked hard to get us through the pandemic. The IRS website provides a table for the breakdown and phaseout of the Earned income credit for the tax year 2021.
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