What you need to know
There are key provisions in the recently passed American Rescue Plan Act (ARPA) that contain tax breaks that may benefit you and your family during the 2021 tax year. Below are some provisions that may affect your taxes.
Child and dependent care credit (DCC)
You may be eligible for a larger tax credit in 2021 if you and your spouse work and have children in daycare or if you are a caretaker for an adult.
- To be eligible for the full tax credit, your adjusted gross income must not exceed $125,000.
- Dependents can include people of all ages as long as they meet the dependent qualifications.
- For one qualifying dependent, you can spend up to $8,000 in dependent care expenses and get a 50% tax credit. This is a maximum credit of $4,000 (up from $1,050).
- You can spend up to $16,000 in dependent care expenses and get a 50% credit, for a maximum credit of $8,000 (up from $2,100), if you have more than one qualifying dependent.
Child tax credit
- For 2021, the CTC increases from $2,000 to $3,000 for kids’ ages 6 to 17 and $3,600 for kids ages 5 and under.
- Your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household) to receive the full tax credit.
- You can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint) if your income is above the thresholds mentioned above.
- Beginning July 2021, you can receive up to 50% of your 2021 child tax credit, in 6 monthly payments. However, the IRS has cautioned that this July start date may be delayed due to a computer system is still being built to handle these monthly payments.
Earned income tax credit
- For households with no children, the maximum earned income tax credit will increase from $543 to $1,502.
- More taxpayers qualify for the earned income credit (EIC). The lower age limit for receiving the credit “decreases” from age 25 to age 19. The upper limit of 65 for receiving the earned income credit is eliminated. There is no upper age limit for 2021.
- When calculating your credit to obtain the maximum credit, you can use either your 2019 income or your 2021 income.
- A third round of stimulus payments in the amount of $1,400 is being sent to qualified taxpayers.
- The stimulus payment will phase-out for income over $75,000 for single taxpayers, $112,500 for head of household taxpayers and $150,000 for married couples.
Actions you can take
- You should look for updates on the advance payments for the child tax credit. The IRS is trying to figure out how to give half of your child tax credit to you in 2021. Check for updates as to when the payments will begin in July or if there will be a further delay. You may opt out of the early 2021 payment. However, you will have to wait for instructions on how to opt out.
- You might think about increasing your dependent care expenses. Consider whether you should increase your dependent care expenses for the rest of 2021 to take advantage of the substantial increase in this credit. However, this tax credit increase is currently for 2021 only. When you calculate your credit in 2022, you will not be able to include the same amount of expenses.
- Perform a tax forecast. Due to the big increase in these credits you may consider estimating next year's tax bill. It may make sense to adjust your withholdings to account for a lower tax obligation. To lower your tax obligation it might make sense to adjust your withholdings.
- When forecasting your earned income tax credit, be conservative. The impact is not certain for those over 65 that have no children. For example, when calculating the earned income tax credit are Social Security benefits considered earned income? Due to the larger standard deduction, how will those over 65 be effected? You may wish to be conservative about the credit amount you'll receive until the IRS issues further clarification.
At Summit CPA we offer multiple resources to assist you with all of your tax and financial planning needs. Contact our office at 866-497-9761 to schedule an appointment with our advisors.