**Tax day has been extended to Monday, May 17th**
Taxes and Coronavirus are two hot topics right now. President Biden’s historic American Rescue Plan Act of 2021 (the “ARPA”) enacted three major tax provisions for families. They are worth knowing about if you have children or work with families. Here are the high points.
Child Tax Credit
ARPA made five significant changes to the Child Tax Credit. They include:
- Increased Amount: ARPA increases the Child Tax Credit from $2,000 to $3,000 per child under the age 18, for 2021 only. For children under the age of 6, the credit can be an additional $600, for a total of $3,600.
- Expanded Scope: Children normally must be under the age of 17 at year-end to qualify, but for 2021, that age is under 18.
- Full Refund: In past years if a party's income was less than $2,500, they could not receive the Child Tax Credit refund. For 2021, the credit is refundable for people who have no income.
- Lower Income Phase Out: In 2020, the Child Tax Credit did not phase out until a taxpayer’s adjusted gross income reached $200,000 (and $400,000 for a joint return). The 2021-only benefits phase out if the party's income is $75,000 (single), $112,500 (head of household), and $150,000 (filing jointly). However, those who do not qualify for the expanded benefits are still eligible for the Child Tax Credit under the 2020 rules; in other words, they can still receive the $2,000 per child credit.
- Advance Payments: Those eligible for the Child Tax Credit receive a cash benefit this year rather than receiving credit when filing their tax return in the spring of the following year. More specifically, the IRS will make monthly payments from July 2021 through December 2021 equal to one-half of the Child Tax Credit. The remaining half will be received after the taxpayer files the 2021 tax return.
Child and Dependent Care Credit
The Child Care Credit gives a credit against taxes for a percentage of childcare expenses, up to a maximum amount of covered expenses.
- Increased Maximum Percentage: In 2020, the percentage ranged from 20% to 35% depending on income. The maximum percentage is now 50%, for 2021 only.
- Higher Expense Level: In 2021, both the maximum percentage and the maximum expense level increased. The included expense increase to $8,000 for one child and $16,000 for two or more children. As a result, in 2021, the maximum credit is $4,000 for one child and $8,000 for two or more children. This amounts to $3,000 and $6,000 more than earlier years.
- Full Credit: In past years, if you did not owe any tax or the credit reduced your taxes to zero, you did not receive the full benefit. In 2021 only, if you have an $8,000 credit and you do not owe any tax, you will receive the full $8,000 payment from the government!
- Phase-down: The credit always phased down for higher-income bracket taxpayers, but the phase-down is different in 2021. Previously, phase-down would reduce the percentage to 20% of day care expenses. For 2021, the phase-down can reduce the percentage all the way to zero for those in a high-income bracket (adjusted gross income of $440,000 or more).
Earned Income Credit
The new law also increases the benefits from the Earned Income Credit. The Earned Income Credit is effectively a government subsidy to people who have some earned income (typically wages and tips), but not a lot. The credit increases as earned income increases, up to a point, and then decreases (to zero) as income increases.
- Maximum credit increased: For people with no children, ARPA increases the maximum credit from $543 to $1,502.
- Age limit dropped: Qualifying childless taxpayers may be as young as age 19, if they are not students. In years past, the age limit was 25.
- Option to use 2019 income: Taxpayers now have an option to use 2019 earned income, if that yields a better result than their 2021 income.
- Married filing separately: Until now, if you filed as "married filing separately," you were not eligible for the earned income credit. For 2021 and future years, you may be eligible even if you are married filing separately. To qualify:
- you must have lived with a qualifying child for more than half the year; and
- you must either: have separated before July 1; or have signed a divorce or separation agreement and be living separate by December 31.
All three provisions were modified to give less benefit to very high-income taxpayers and dramatically more benefits to moderate-income to low-income earners. Now, only the “Married Filing Separately” provision will last into 2022. These three provisions make an interesting negotiation dynamic for our family law attorneys in 2021.
*Tiffany Plutowski is Certified Divorce Financial Analyst and paralegal for Gjesdahl Law, P.C. She is not an accountant and does not give tax advice. Make tax decisions with your tax professional.