The American Rescue Plan Act of 2021 passed in March has expanded the Child and Dependent Care and Child Tax Credits available for the 2021 tax year.
Child Tax Credit
The total credit is up to $3,000 per qualifying child ages 6-17 at the end of 2021. For children under age 6 at the end of 2021, the total credit is $3,600. The full amount is available until the taxpayer’s AGI (adjusted gross income) reaches the phase out at $150,000 (married filing joint), $112,500 (head of household/qualifying widow/widower), and $75,000 for all other taxpayers. Taxpayers with adjusted gross income over those amounts will see their credit reduced by $50 for every $1,000 over the threshold.
Advance payments of the 2021 Child Tax Credit will be made starting July 2021 through December 2021. The advance payment will be up to 50% of the total Child Tax Credit. $250/month children ages 6-17 & $300/month children under age 6. The advance payments will be estimated from information included on the taxpayers’ 2020 tax returns (or 2019 if 2020 has not been filed).
Payments will be received via direct deposit or a mailed check based on what information the IRS has on file for each taxpayer.
If taxpayers prefer to receive the entire credit when filing their 2021 tax return, they will be able to opt out of the monthly payments through the IRS’s online portal; married filing joint taxpayers will need to complete the opt out for both spouses and everyone has until June 28, 2021 to opt out for the July payment. In addition, the portal will allow taxpayers to update information related to changes in their income, filing status or the number of qualifying children. The IRS has launched the online portal here.
Child and Dependent Care Credit
In addition to the Child Tax Credit expansion and prepayment, the American Rescue Plan Act has also increased the Child and Dependent Care Tax Credit as well as raised the phase out amounts to include more qualifying individuals.
For 2021 only (so far), the maximum percentage of deductible child care expenses is raised from 35% to 50% allowing expenses up to $8,000 for one eligible child and $16,000 for two or more children (up from $3,000 and $6,000). The maximum credit available is $4,000 for one child or $8,000 for multiple children for incomes below $125,000. After which, the credit percentage phases out to 20% when income reaches $183,000. The 20% credit lasts until household income reaches $400,000 and is phased out completely at $438,000. This law also made the credit fully refundable.
Individuals with a Dependent Care FSA through their employer should consider whether the credit on their tax return would be more advantageous than the payroll deduction for 2021. However, the maximum contribution allowed this year has also been increased from $5,000 to $10,500.
Contact our team to discuss how the credits may impact your tax situation for 2021.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.