By most measures, 2021 is shaping up to be much better than 2020. The coronavirus appears to be less of a threat, the economy is beginning a comeback, and the American Rescue Plan is expanding some tax credits for parents and others with children.
The American Rescue Plan (ARP) was passed by Congress earlier this year. The new law sent out direct Economic Impact Payments to millions of Americans. But it also changed tax laws for 2021—and beyond.
Earned Income Tax Credit (EITC)
The EITC has been a workhorse tax credit for some time now, providing working families with a needed tax break. The ARP expands the credit, so more workers and working families who also have investment income can qualify for the EITC.
Starting this year, qualified filers can receive up to $10,000 in investment income and still be eligible for the EITC. The new law also opens doors for separated spouses.
Those who are married but separated can now qualify for the EITC if they live with their qualifying child for more than half the year and can satisfy one of these two requirements:
- The taxpayer doesn’t "have the same principal place of abode as the other spouse for at least the last six months of tax year for which the EITC is being claimed"
- The taxpayer is "legally separated according to their state law under a written separation agreement or a decree of separate maintenance and does not live in the same household as their spouse at the end of tax year for which the EITC is being claimed"
Child Tax Credit (CTC)
The Child Tax Credit saw four major changes that apply only for the 2021 tax year. The American Rescue Plan increased the amount of the credit and made the CTC available for qualifying children who turn age 17 in 2021.
But the ARP made two more changes that millions of families are likely to see firsthand. The CTC was also made fully refundable for most taxpayers and for the first time, qualified taxpayers will be able to get half of the estimated 2021 credit—in advance.
Those taxpayers with qualifying children under age 18 at the end of 2021 can now get the full credit even if they have little or no income.
Before this year, the credit was capped at $2,000 per qualifying child and was refundable up to $1,400 per child. The American Rescue Plan boosts the credit limit to $3,000 per child aged 6 through 17 at the end of 2021; the cap rises to $3,600 each for children age 5 and under at the end of 2021.
The ARP also expands the number of taxpayers who will get cold cash in their pockets from the Child Tax Credit. The credit is fully refundable for those who have their main homes in the U.S. for more than half the tax year. Bona fide residents of Puerto Rico enjoy the same privilege.
If a taxpayer qualifies for the fully refundable credit, the normal $1,400 cap does not apply. A taxpayer qualifies for the maximum credit if they have 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 jointly and qualifying widows and widowers
Above these levels, the credit begins a phase-out.
Advance Child Tax Credit Payments
The IRS says it expects to send out advance payments of the Child Tax Credit from July 15 through December of this year. Eligible taxpayers will get half of their estimated 2021 CTC in monthly payments during that time.
The payments will go out to those taxpayers who qualify for the Child Tax Credit and have a main home in the U.S. for at least half of the year. This includes all 50 states and the District of Columbia. American military personnel who are stationed outside of the country on extended active duty are also eligible, since they 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," the IRS explains. "Advance payments will not be reduced or offset for overdue taxes or other federal or state debts that taxpayers or their spouses owe.”
Since the advance payments amount to half of the tax credit, taxpayers can claim the remainder when they file their 2021 income tax return.