Expanded child tax credit for 2021 only

The American Rescue Plan made several notable but temporary changes to child tax credit, including:

• Increasing the amount of the credit
• Making it available for qualifying children who turn age 17 in 2021
• Making it fully refundable for most taxpayers
• Allowing many taxpayers to receive half of the estimated 2021 credit, in advance.

Taxpayers who have qualifying children under age 18 at the end of 2021 can now get the full credit if they have little or no income from a job, business, or other source. Prior to 2021, the credit was worth up to $2,000 per qualifying child, with the refundable portion limited to $1,400 per child. The new law increases the credit to as much as $3,000 per child ages 6 through 17 at the end of 2021, and $3,600 per child ages 5 and under at the end of 2021. For taxpayers who have their main homes in the United States for more than half of the tax year and bona fide residents of Puerto Rico, the credit is fully refundable, and the $1,400 limit does not apply.

The maximum credit is available to taxpayers with a modified adjusted gross income of:

• $75,000 or less for single filers and married persons filing separate returns
• $112,500 or less for heads of household
• $150,000 or less for married couples filing a joint return and qualifying widows and widowers

Above these income thresholds, the excess amount over the original $2,000 credit — either $1,000 or $1,600 per child — reduces by $50 for every $1,000 in additional modified AGI. The original $2,000 credit continues to be reduced by $50 for every $1,000 that modified AGI is more than $200,000; $400,000 for married couples filing a joint return.

Advance child tax credit payments

From July 15 through December 2021, Treasury and the IRS will advance one half of the estimated 2021 child tax credit in monthly payments to eligible taxpayers. Eligible taxpayers are taxpayers who have a main home in the United States for more than half the year. This means the 50 states and the District of Columbia. U.S. military personnel stationed outside the United States on extended active duty are considered to have a main home in the United States.

The monthly advance payments will be estimated from their 2020 tax return, or their 2019 tax return if 2020 information is not available. Advance payments will not be reduced or offset for overdue taxes or other federal or state debts that taxpayers or their spouses owe. Taxpayers will claim the remaining child tax credit based on their 2021 information when they file their 2021 income tax return.

Childless EITC expanded for 2021

For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC), a fully refundable tax benefit that helps many low- and moderate-income workers and working families. That’s because the maximum credit is nearly tripled for these taxpayers and is, for the first time, made available to both younger workers and senior citizens.

In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don’t qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.

Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.

Changes expanding EITC for 2021 and future years

Changes expanding the EITC for 2021 and future years include:

• Singles and couples who have Social Security numbers can claim the credit, even if their children don’t have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn’t qualify for the credit
• More workers and working families who also have investment income can get the credit. Starting in 2021, the limit on investment income is increased to $10,000. After 2021, the $10,000 limit is indexed for inflation. The current limit is $3,650.
• Married but Separated spouses can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for at least six months out of the year and must have a qualifying child living with them for more than half the year.

Advance Child Tax Credit payments

The IRS urges families to file their 2020 return as soon as possible. This includes many low-and moderate-income families who don’t normally file returns. Often, those families will qualify for an Economic Impact Payment or tax benefits, such as the EITC. This year, taxpayers have until May 17, 2021, to file a return.

To speed delivery of any refund, be sure to file electronically and choose direct deposit. Doing so will also ensure quick delivery of the Advance Child Tax Credit payments to eligible taxpayers, later this year.

In the next few weeks, eligible families can choose to decline receiving the advance payments. Likewise, families will also be able to notify Treasury and IRS of changes in their income, filing status or number of qualifying children. Details will be available soon.

The IRS also urges community groups, non-profits, associations, education groups and anyone else with connections to people with children to share this critical information about the Child Tax Credit as well as other important benefits. The IRS will be providing additional materials and information in the near future that can be easily shared by social media, email and other methods.

For the most up-to-date information on the Child Tax Credit and advance payments, visit Advance Child Tax Credit Payments in 2021.

Student Loan Debt Forgiveness. Normally, canceled debt – including student loan debt – is considered taxable income and taxed as such. Under the ARPA, however, for eligible loans, the discharge of student loan debt – either full or partial – will not be viewed as taxable income for tax years 2021 through 2025. Eligible loans are those that have been used solely for post-secondary education and that are made, insured, or guaranteed by the US government.  Note that the Act does NOT forgive student loans; it merely makes forgiveness nontaxable if it does occur.

What about 2021?

COVID Tax Tip 2021-79, June 3, 2021

This is the second of two tax tips providing an overview of ways the American Rescue Plan may affect some people’s 2021 taxes. Part 1 is available on IRS.gov.

Expansion of Certain Credits

The Act significantly expands the Child Tax Credit (CTC) for 2021 (the expansion is currently only for 2021).

The 2020 CTC was $2,000 per dependent child under age 17, subject to phase-out for high-income taxpayers.

For 2021, regardless of the level of earned income, a CTC of $3,600 for a dependent child under age 6 and $3,000 per child up to age 17 (under 18 rather than under 17 under prior law) is allowed. The credit is fully refundable for 2021, and there is no earnings floor of $2,500. The IRS is supposed to pay part of the credit out in advance from July to December 2021 (with any excess being claimed on the 2021 returns when filed).

The Act also increases the amount of the 2021 Earned Income Tax Credit for adults without children from about $530 to $1,500, and the related income tax cap is increased from about $16,000 to about $21,000. It is expanded to include individuals age 19-24 who are not full-time students and those over 65.

The Child and Dependent Care Tax Credit will be expanded for 2021 to cover up to 50% of qualifying childcare expenses up to $4,000 for one child and $8,000 for two or more children for 2021 (currently the credit is up to 35% of $3,000 for one child or 35% of $6,000 for two or more children). The credit will be refundable so that families with low tax liability will be able to benefit; the refund will be fully available to families earning less than $125,000 and partially available for those earning between $125,000 and $400,000.

Throughout the summer, the IRS will be adding additional tools and online resources to help with the advance Child Tax Credit. One of these tools will enable families to un enroll from receiving these advance payments and instead receive the full amount of the credit when they file their 2021 return next year.

Additionally, later this year, individuals and families will also be able to go to IRS.gov and use a Child Tax Credit Update Portal to notify IRS of changes in their income, filing status, or number of qualifying children, update their direct deposit information; and make other changes to ensure they are receiving the right amount.

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