The American Rescue Plan Act of 2021: What you need to Know!

The American Rescue Plan Act of 2021: What you need to Know!

The American Rescue Plan of 2021, intended to drive $1.9T economic stimulus and provide fiscal relief in response to the ongoing COVID-19 pandemic. Here are some of the key facts that we felt were important for you and your family to be aware of, you can find all of the details here:
    • Earned Income Tax Credit
The Act increases the maximum EITC credit for workers without children and extends eligibility to more people, including young adults aged 19-24 who are not full-time students and people aged over 65.
    • Child Tax Credit
The Act temporarily expands the child tax credit, previously worth up to $2,000 per child under the age of 17, to $3,600 for children up to age 5 and up to $3,000 for children 6 to 17 years old.
    • Child and Dependent Care Tax Credit
The tax credit for child and dependent care would increase for 2021 from a maximum of $1,050 for one child and $2,100 for two or more children to $4,000 and $8,000. The credit would also be fully refundable.
    • Small Business Relief
The Act provides additional relief for small businesses and hard-hit industries . This includes $7.25 billion additional for the Paycheck Protection Program, including to expand eligibility to additional nonprofits and digital news services, additional funds are allocated for the Shuttered Venue Operators Grant program, and now allows businesses to apply for both a PPP loan after Dec. 27, 2020, and the SVOG, and $ 15 billion additional for Targeted Economic Injury Disaster Loan Advance (EIDL) payments. While you personally may or may not qualify from the benefits included in the latest American Rescue Plan Act, your children may certainly qualify especially if they have young families. Let’s take a deep dive into the chile and dependent tax credits so you can be prepared to have this conversation with your loved ones. The temporary enhancements to the Child Tax Credit for 2021 include a significant number of changes that should lower the tax bills of families with young children. Below is an overview of the key changes:

2020 Child Tax Credit

2021 Child Tax Credit

  • Worth $2,000 per child under the age of 17 as long as you claim them as a dependent and lives with you for at least six months
  • 17-year-old dependents can qualify, and the credit is increased to $3,000 per child ($3,600 per child under age 6) for many families
  • The credit begins to phase out if your adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return.
  • The credit begins to phase out at AGIs of $75,000 on single returns, $112,500 on head-of-household returns, and $150,000 on joint returns. Families who aren’t eligible for the higher child credit for 2021 would still claim the regular credit of $2,000 per child, less the amount of any monthly payments they got, subject to the $400,000/$200,000 AGI threshold limits.
  • Up to $1,400 of the child credit is refundable for some lower-income individuals with children, but these individuals must also have earned income of at least $2,500 to get a refund.
  • The credit is fully refundable, and the $2,500 earnings floor is removed.
  • Half of the credit can be received in advance by having the IRS send periodic payments to families from July 2021 to December 2021

Completely separate from The Child Tax Credit is the Child and Dependent Care Tax Credit (CDCTC). This tax credit is intended to help working families pay expenses for the care of children, adult dependents, or an incapacitated spouse. Below is an overview of the key changes:

2020 Child and Dependent Tax Credit
2021 Child and Dependent Tax Credit

Qualifying dependents for the CDCTC include the following:

  • Children who are 12 or younger at the end of the tax year
  • Dependent adult family members or spouses who are not able to care for themselves due to mental or physical impairments, unless they had gross income of $4,150 or
more
  • No changes to the qualification requirements
  • The maximum Applicable Percentage is 35%. That percentage, however, is quickly reduced to as little as 20%, phasing down as the taxpayer’s AGI exceeds $15,000 (regardless of filing status).
  • Under the American Rescue Plan, the maximum Applicable Percentage is increased to 50%. Furthermore, the 50% Applicable Percentage does not begin to be phased out until the taxpayer’s AGI exceeds $125,000 (regardless of filing status)
  • The maximum amount of care expenses to which you can apply the credit is $3,000 if you have one dependent and $6,000 if you have more than one dependent. That means the largest possible credit is $1,050 with one dependent and $2,100 with multiple.
  • Under the American Rescue Plan, the maximum amount of expenses eligible to be used in the calculation of the Child and Dependent Care Tax Credit is more than doubled in 2021, to $8,000 of expenses when a taxpayer has one qualifying child and $16,000 of expenses when a taxpayer has two or more qualifying children

At Client First Capital, we understand that the changes and eligibility in the American Rescue Plan Act of 2021 can be confusing and that is why we are here to help. It is not only important for us to work with you to understand the potential tax implications for you and your family, but to also come up with a strategy to grow and protect your finances during the pandemic and beyond.