Expanded Tax Credits Could Significantly Reduce Your Tax Liability in 2021
The pandemic has changed quite a bit about life and finances, especially in the homes of low- and middle-income earners. The tax relief measures and other legislative efforts we have welcomed have been necessary to ease some of the strain American families are experiencing. Some of the COVID-19 tax relief provided to individual taxpayers came in the form of expanded tax credits for 2021.
In combination with expected changes to the tax code, these expanded tax credits could significantly reduce the 2021 federal income tax liability for some individuals. In fact, if you make less than $75,000 this year, there’s a chance you may not owe much or any federal income tax in 2021.
The American Rescue Plan Act (ARPA) not only provided individuals under that threshold with tax-free stimulus checks of up to $1,400 per adult and dependent but also expanded the earned income tax credit (EITC), child tax credit (CTC), and child and dependent care tax credit (CDCTC) for 2021. And, with the standard deduction increasing to$12,550 for individual tax filers and $25,100 for married couples filing jointly in 2021, these folks could see some pretty hefty benefits when they file their 2021 returns in 2022.
Expanded 2021 Earned Income Tax Credit
The EITC is a refundable tax credit available for eligible taxpayers earning low to moderate income. Depending on your income, filing status, and number of qualifying dependents, the 2021 credit could range from $1,502 to $6,728. To help determine eligibility, the IRS has created an EITC Eligibility Assistant.
For 2021, you can use your 2019 income or 2021 income to calculate the credit. Since the credit is generally higher the less you earn, you may want to calculate it for both years to ensure you maximize your 2021 EITC.
Special rules are in place for 2021. For example, there is no maximum age limit for the credit for the 2021 tax year. For individuals without dependents, the general minimum age decreases from 25 to 19. The income at which the maximum credit is reached increases to $9,820. The income at which the phase-out begins also increases to $11,610 for non-joint filers.
Starting in 2021, your investment income must be $10,000 or less (previously $3,650 or less). If you didn’t claim the EITC for any of the last three years but think you qualified for it, you may consider amending your return to claim the credit.
Expanded 2021 Child Tax Credit
The CTC can be of great assistance to qualifying parents by helping them afford the necessities of childcare, such as food, diapers, or school supplies. For 2021, the age for a child to qualify increases from 16 to 17 and the credit is fully refundable. Also for 2021, the per-child credit increases to $3,000 ($3,600 for children under 6) from $2,000 for families with income below specified income thresholds. One-time credits of $500 each may be claimed for qualifying 18-year-olds or full-time college students aged 19 to 24.
Credit phase-outs begin at $75,000 for individuals, $112,500 for heads of household, and $150,000 for married couples. The credit phases out entirely at $240,000 for taxpayers filing as single or head of household and at $440,000 for married couples filing jointly.
The IRS began sending out advance payments this month and will continue to send them through the end of this year. Unless you opt-out, you’ll receive up to 50% of the full credit amount in six monthly installments paid through the end of this year. The remainder would then be claimed as a lump sum on your 2021 return.
In most cases, these advance payments and age qualifications are determined by information on file for 2020. So, while the credit is refundable for 2021, taxpayers should weigh the immediate benefits against the possible effects on their 2021 federal tax return. If a child will move across an age threshold in 2021 (from 6 years old to 7 or from 17 to 18), or your household income crosses a threshold, you may receive more than you ultimately qualify for in advance payments. In cases like these, you could be subject to a repayment amount when you reconcile the credit on your 2021 return.
To help determine eligibility, the IRS has created an Advance CTC Eligibility Assistant. To avoid having to repay any CTC amounts, taxpayers should also use the IRS’s CTC Update Portal to update their personal information or opt-out of advance payments in 2021. If you are not required to file a return, you may still qualify to receive the credit. In this case, you may enter your information in the IRS’s Non-Filer Sign-Up Tool.
Expanded 2021 Child and Dependent Care Tax Credit
The CDCTC is available to help eligible taxpayers cover the costs of caring for children and other dependents. For 2021, the credit is fully refundable. The CDCTC is fully available, based on 50% of the expense amount, to families making less than $125,000. Over that threshold, the credit is partially available up to a plateau of 20% and phases out at a maximum income of $440,000. Additionally, the exclusion for employer-provided dependent care assistance for 2021 increases to $10,500.
Contact me today if you have questions or to find out if these expanded tax credits could help you reduce your 2021 tax liability.
Karla Brannen is a discerning provider of tax planning and compliance services, including services bearing multi-state intricacies. Her panoramic approach to bookkeeping and CFO services enables her to address multi-faceted and unique client needs. Karla works with individuals, their trusts and estates, and small businesses, and she provides tax filing services for employee benefit plans.