Democratic lawmakers got a legislative win with passage of the American Rescue Plan Act of 2021. It includes a long-standing Democratic goal: fighting child poverty through the tax code.
There’s a revamped child tax credit for 2021. The law hikes:
- The $2,000-per-child credit to $3,000
- $3,600 for kids under 6
- Let’s 17-year-olds qualify
- Makes the credit fully refundable
- Calls the IRS to pay 50% of it in advance to qualifying families
Upper-incomers won’t get the higher credit. It begins to phase out at AGIs of $75,000 for singles, $112, 500 for household heads and $150,000 for joint filers. The credit amount is reduced by $50 for each $1,000 of AGI over the applicable threshold amount. The phaseout is limited to the $1,00 of $1,600 temporary increased credit amount for 2021 and not to the $2,000 credit. So families who aren’t eligible for the $3,000 or $3,600 credit, but who have AGIs at or below $400,000 on joint returns or $200,000 on others, still get the $2,000 credit.
The IRS is required to pay half of the credit in advance. If all goes as planned, it will send out a payment to qualifying families each month from July through December 2021. It will determine eligibility for the credit and payments based on 2020 or 2019 returns. THe amount a family will get each month is based on the AGI, the number of children and the ages of the kids. Families who qualify for the full $3,000 or $3,600 credit could see checks of $250 or $300 per child for six months. Those with higher incomes who qualify for the $2,000 credit could get monthly payments of $167 per child.
You’ll need to let the IRS know of changes to your family circumstances or AGI. The IRS is developing an online tool so that you can update your 2021 income, marital status and the number of your qualifying children. You can also opt out of advance payments on the portal and instead take the full credit on your 2021 return.
The payments are advances of the 2021 child tax credit and aren’t taxable. On your 2021 Form 1040, you’ll reconcile the payments you got with your actual credit. Some people who receive overpayments needn’t repay the excess to the IRS. Families with 2021 AGIs or below $40,000 for singles, $50,000 for household heads and $60,000 for joint filers won’t have to repay any credit overpayments they get. Families with 2021 AGIs of at least $80,000, $100,000 or $120,000, respectively, will need to repay the full amount of any overpayment when they file their 2021 returns. Those with 2021 AGIs between the thresholds need to repay only part of their overpayments.
This expanded child tax credit is temporary. It applies only for 2021. But Democratice lawmakers want to make it permanent, touting the impact that such a higher and fully refundable credit would have on reducing child poverty.
There are a number of other tax easings in the American Rescue Plan. A third round of stimulus checks of $1,400 for singles and household heads and $2,800 for joint filers, plus $1,400 more for each dependent claimed on the return. They begin to phase out at AGIs of $150,000 for couples, $112,500 for household heads and $75,000 for singles, and end at AGIs above $160,000, $120,000 and $80,000.
The IRS will first look to 2020 returns to determine eligibility for the payments. If a 2020 return hasn’t yet been filed, the IRS will look to 2019. Similar to before, Social Security recipients who typically don’t have to file returns needn’t file. Ditto for those individuals who get Social Security disability or veterans benefits.
People with direct deposit should have received the money or will get it soon. Eligible folks without direct deposit should get a paper check or debit card in the mail. Use the IRS’s Get My Payment online tool to check the status of your stimulus payments. The money is an advance payment of a tax credit on the 2021 return.
Up to $10,200 of unemployment benefits received in 2020 are not taxable for federal income tax purposes. For joint filers, it’s $10,200 of benefits per spouse. The relief applies only to individuals and couples with AGIs of less than $150,000. The IRS has revised the instructions to Schedule 1 of the Form 1040 to reflect this change. The IRS is also urging individuals who already filed their 2020 1040 not to amend it to claim the exclusion. The agency’s head says the IRS plans to automatically issue refunds.
More individuals qualify for the health premium credit for 2021 and 2022 for buying insurance through an Exchange. There are also increased subsidies. The Earned Income Tax Credit for 2021 is higher for workers without children. Also, 2019 earned income can be used to figure the earned income credit for 2021. Working parents get a higher child and dependent care credit for 2021. Up to $4,000 for one child and $8,000 for two or more kids, up from $1,050 and $2,100 for 2020. Parents with up to $125,000 of AGI are eligible for the full credit. Taxpayers with AGIs between $125,000 and $500,000 get a partial credit. Working parents can contribute more to dependent care FSAs in 2021. They can put in up to $10,500 of pre tax wages, up from $5,000, if the plan allows. And most student loan debt forgiven in 2021 through 2025 will be tax-free.
The Kiplinger Tax Letter
March 2021