Signed into law on March 11th, President Biden’s $1.9 trillion American Rescue Plan Act of 2021 (ARP) is the largest direct-to-taxpayer stimulus legislation ever passed, and it came just in time to save millions of Americans whose unemployment benefits were about to expire. In addition to extending unemployment relief, the ARP provides individual taxpayers and small business owners with a number of other vital financial benefits aimed at helping the country rebound from last year’s economic downturn. Of these benefits, you’ve likely already seen one of the ARP’s leading elements—the $1,400 direct stimulus payments, which went to taxpayers with incomes of less than $75,000 for individuals and $150,000 for joint filers. But beyond the stimulus, the ARP comes with numerous other provisions that can seriously boost your family’s finances for 2021. To highlight the ways the ARP can impact your family’s wallet, in this article and in part two, we’ll break down six of the legislation’s key elements.
1. Child Tax Credit
If you have minor children, the ARP enhances the Child Tax Credit (CTC) in some major ways. Not only does it significantly increase the amount of the credit, but it also changes the way you can receive the money.
Under the current CTC, parents can receive a maximum tax credit of $2,000 for each qualifying child under age 17, with $1,400 of that credit being refundable. The ARP increases that credit to $3,000 a year for each child aged 6 to 17 and $3,600 for each child under 6—and both amounts are fully refundable. Parents who qualify for the full amount of $3,000 or $3,600 per child include single filers earning less than $75,000, and joint filers earning less than $150,000 annually. After this, the credit begins to phase out. However, parents who file singly and earn less than $200,000 ($400,000 for joint filers) could still claim the original $2,000 credit.
In addition to increasing the credit, the ARP also changes the way parents can access the money. Instead of applying the full amount of the credit to your income taxes at the end of the year and possibly getting a refund, you can now opt to receive the credit upfront in monthly payments of $250 per qualifying child or $300 for children under age 6.
This means you can get half of the credit in the form of monthly cash payments and claim the other half when you file your 2021 taxes in April 2022. If you opt for the monthly payments, the IRS expects to send those out starting in July 2021 and lasting through December 2021. The ARP directs the Treasury Department to create an online portal that allows parents to opt-out of advance payments and report any changes in income, marital status, or number of eligible children.
Note that these increases are only in effect for 2021 and will revert back to the original amounts in 2022. However, there’s currently support in both Congress and the White House for making them permanent. Check our weekly blog and IRS.gov for updates to the legislation.
2. Child and Dependent Care Tax Credit
In order to provide financial assistance to those families who pay for child care or care for an adult dependent, such as an elderly parent, the ARP increases the Child and Dependent Care Tax Credit for 2021—and for the first time, it makes the credit refundable.
For 2021, the ARP provides a tax credit for the expenses associated with the care of qualifying dependents (kids 12 or younger or a disabled adult) for a total of up to $4,000 for one dependent and $8,000 for two or more dependents. This is an increase from the max credit amounts for 2020 ($3,000 for a single dependent and $6,000 for multiple dependents).
The IRS allows you to claim a fairly wide range of qualified expenses for such care, including the following:
Babysitters, as well as housekeepers, cooks, and maids who take care of the child
Day camps and summer camps (overnight camps are not eligible)
Before and after-school programs
Nursery school or preschool
Nurses and aides who provide care for a disabled dependent
The ARP also makes more people eligible for the credit by raising the income limit for the full credit to $125,000 per year. Those making between $125,000 and $400,000 are eligible for a partial credit.
As an added bonus, the credit is fully refundable for 2021, so you could get a refund for the credit even if your tax bill is zero. However, as with the changes to the Child Tax Credit, these updates are only available in 2021, unless additional legislation is passed. There are special rules for divorced couples looking to claim the Child and Dependent Care Tax Credit, so if that’s you, contact your tax professional for support.
3. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit for low- and middle-income workers that is frequently overlooked—and the ARP makes the credit more valuable for many taxpayers in 2021 than ever before. The amount you can claim for the EITC depends on your annual income and the number of kids you have, but people without kids can qualify, too. For 2021, the ARP revises a number of EITC rules and makes an increased credit available to more childless taxpayers. While in past years, childless filers could only qualify for a relatively small credit, for 2021 the ARP boosts the maximum EITC for those without children from around $540 to just over $1,500. The legislation also reduces the minimum age for a childless taxpayer to qualify, from 25 to 19, and it also eliminates the maximum age of 65 for the credit, so seniors of any age can qualify, as long as they meet the income requirements. The above changes from the ARP are only for 2021, but the law makes some permanent changes to the EITC as well.
In prior years, you couldn’t qualify for the EITC if you had more than $3,650 in investment income for the year. But thanks to the ARP, starting in 2021, you can have up to $10,000 of such “disqualified” income without losing the EITC, and for 2022 and beyond, this limit will remain and be adjusted for inflation.
Additionally, just for 2021, you can calculate your EITC using either your 2019 earned income or your 2021 earned income and use whichever number gets you the bigger credit. And don't worry—if you go with the 2019 number, it has no effect on any of your other 2021 tax calculations. For example, if some or all of your income is from self-employment, using your 2019 income to calculate your 2021 EITC won’t increase your 2021 self-employment tax.
Finally, no matter the year, the EITC is fully refundable. This means you can collect the money even if you don’t owe any federal income tax. That said, calculating the credit can be quite complicated, so contact your CPA to support you.
In part two of this series, we’ll cover the remaining three ways the American Rescue Plan can boost your family's finances in 2021.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That is why we offer a strategic planning session, during which you will get more financially organized than you have ever been before and make all the best choices for the people you love. You can begin by contacting our office today to schedule a planning session and mention this article to find out how to get this $750 session at no charge.
Disclaimer: All information on this website is for informational purposes only and is not legal advice. You should contact an attorney trained to work with families on estate planning matters regarding your specific situation. Use of and access to this website or any of the email links contained within the site do not create an attorney-client relationship between the Law Office of Keoni Souza, LLC, and any users or any other party.