Signed into law on March 11th, the $1.9 trillion American Rescue Plan Act of 2021 (ARP) is the largest direct-to-taxpayer stimulus legislation ever passed. 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 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. But beyond the stimulus, the ARP comes with numerous other provisions that can boost your family’s finances for 2021.
To highlight the ways the ARP can impact your family’s wallet, we’ll break down six of the legislation’s key elements. To learn about all the benefits provided by the ARP, meet with us, as your Personal Family Lawyer®.
- Child Tax Credit
If you have minor children, the ARP enhances the Child Tax Credit (CTC). It significantly increases the amount of the credit. 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. $1,400 of that credit is 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. Both amounts are fully refundable.
Parents who qualify for the full amount 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 based on income. For example, 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 credit. Instead of applying the full amount of the credit to your income taxes at the end of the year, you can now opt to receive the credit up front in monthly payments of $250 per qualifying child or $300 for children under age 6.
The above 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. Those payments will last 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 the number of 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.
- Child and Dependent Care Tax Credit
In order to provide financial assistance to those families who pay for child care or care of an adult-dependent, the ARP increases the Child and Dependent Care Tax Credit for 2021. It also makes the credit refundable.
For 2021, the ARP provides a tax credit for the expenses associated with the care of qualifying dependents 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 taxcredit amounts for 2020, which are $3,000 for a single dependent and $6,000 for multiple dependents.
The IRS allows you to claim a fairly wide range of expenses for such care, including the following:
- Day camps and summer camps
- 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 credit from $15,000 to $125,000 per year. Tax payers making between $125,000 and $400,000 are eligible for a partial credit.
Additionally, 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.
There are special rules for divorced couples looking to claim the Child and Dependent Care Tax Credit. If this is your situation, you should meet with us or a financial advisor for support.
- Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit for low- and middle-income workers. The ARP makes the credit more valuable for many taxpayers in 2021 than before. The amount you can claim for the EITC depends on your income as well as the number of kids you have.
The ARP revises a number of EITC rules for 2021. The new rules make an increased credit available to more childless taxpayers. 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. It also eliminates the maximum age of 65 for the credit as long as they meet the income requirements.
The above changes from the ARP are only for 2021. However, the law also 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. Thanks to the ARP, starting in 2021, you can have up to $10,000 of such income without losing the EITC. For 2022 and beyond, this limit will remain.
Below are the maximum EITC amounts for 2021, along with the maximum income you can earn before losing the credit.
2021 Earned Income Tax Credit
|Number of kids
|Maximum earned income tax credit
|Max earnings, single or head of household filers
|Max earnings, joint filers
|3 or more
Additionally, just for 2021, you can calculate your EITC using either your 2019 earned income or your 2021 earned income. You use whichever number gets you the bigger credit. If you go with the 2019 number, it has no effect on any of your other 2021 tax calculations.
Finally, the EITC is fully refundable. This means you can collect the money even if you don’t owe any taxes. That said, calculating the credit can be quite complicated. If you need a referral to a CPA to support you, please feel free to contact us.
Next week, 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 Levi L. Alexander, Personal Family Lawyer®. We do not just draft documents. We help to ensure you make informed and empowered decisions about life and death, for yourself and the people you love. This is why we offer a Family Wealth Planning Session™. During this session, you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session for free.