Tax Changes Made by the American Rescue Plan Act
By: Stacey Nickens
The American Rescue Plan Act was signed into law on March 11, providing for a third round of stimulus to some American families. Taxpayers and their dependents may each be eligible for up to $1,400 in stimulus payments. In addition to these payments, the Act also provided for some changes to the child tax credit, increased the earned income tax credit, and changed the way unemployment benefits from 2020 would be taxed. Let’s review some of these changes to ensure you’re able to take advantage of any applicable tax credits or deductions.
The American Rescue Plan Act increased the 2021 child tax credit to $3,000 for children between the ages of 6 and 17 and to $3,600 for children below the age of 6. The credit is also fully refundable, and the IRS will be paying 50% of the credit in advance to qualifying families.
The increased $3000/$3600 child tax credit is available to single filers with adjusted gross incomes (AGI) of less than $75,000 and joint filers with AGIs of less than $150,000. The credit is then reduced by $50 for every $1,000 the taxpayer earns above the threshold. The credit will be reduced until it hits the traditional $2,000 child tax credit. From there, joint filers with an AGI below $400,000 and other taxpayers with an AGI below $200,000 will still qualify for the full original $2,000 credit.
The IRS will begin sending out payments to qualifying families in July and will continue to send out payments through December. Qualifying families will receive 50% of their child tax credit over the course of those six months. For example, a family that qualifies for a $3,000 child tax credit would receive $250 each month. The monthly payments will be determined by AGI, number of children, and ages of children.
The IRS is currently working on developing an online tool that will allow families to update their 2021 income, marital status, and number of qualifying children. This tool will also allow families to opt out of the 50% monthly advances and instead receive the full credit when they file their 2021 return.
When you file your 2021 return, you may find that you were overpaid in child tax credits. If this is the case, you may have to pay some of that overpayment back to the IRS. You will not have to pay back overpayments if you’re a single taxpayer with a 2021 AGI below $40,000 or a joint filer with a 2021 AGI below $60,000. However, you will have to pay back overpayments if you’re a single taxpayer with a 2021 AGI of at least $80,000 or a joint filer with a 2021 AGI of at least $120,000. Those with AGIs between those thresholds may have to pay back portions of their overpayment.
Take note: The increased child tax credit is currently only available for 2021.
Similarly, working parents are eligible for an increased child and dependent care tax credit in 2021. The increased credit provides for $4,000 for one child and $8,000 for two or more children. Parents with AGIs up to $125,000 qualify for the full credit, and parents with AGIs between $125,000 and $500,000 qualify for partial credits.
The American Rescue Plan Act also stated that up to $10,200 in unemployment benefits received in 2020 will not be taxable. Joint filers could be eligible for $10,200 in tax relief per spouse. This relief will only be available to taxpayers whose AGI is below $150,000. Additionally, if you already filed your return and paid taxes on your unemployment benefits, the IRS is encouraging taxpayers to not file an amendment. Instead, the IRS will automatically be issuing refunds.
The Act increased the 2021 earned income tax credit for workers without children. Workers can also choose to use their 2019 income to determine their 2021 income tax credit.
Finally, the American Rescue Plan Act extends the payroll tax credit for businesses that provided sick and family leave to employees impacted by COVID-19. The Act also extends the employee retention tax credit for businesses financially impacted by the pandemic who continued to pay their employees.
