Recent tax law changes just enacted under the American Rescue Plan Act (ARPA) may affect you. The ARPA was passed by Congress and signed into law on March 11, 2021. This is the third round of the COVID-19 relief packages. These also produced the latest stimulus checks of $1,400 for qualifying individuals.
With all of the recent news about the ARPA, I have had quite a few questions from friends and family. These center on the expanded child credit and dependent care tax credits that were also contained in this legislation. Here are some of the highlights of those questions!
What are the child tax credits?
First, to clarify, these are not new tax credits. The child tax credit and the child and dependent care credit have been around for some time in the tax law. What is new is the expansion of the amount of the credits along with the enhanced rules in calculating and receiving them.
The child tax credit is being increased from $2,000 per qualifying child under the age of 17 to $3,600 per qualifying child under the age of 6. It is also increased to $3,000 per qualifying child under the age of 18. Furthermore, the credit was also made fully refundable for 2021 with up to half of it being paid out in advance from July to December.
Details, please.
Thus, taxpayers with a qualifying child started to receive a monthly payment in July to help during the economic recovery from COVID-19. The credit starts to phase out at $150,000 of modified adjusted gross income for married filing joint taxpayers. The same is true at $112,500 for taxpayers filing as head of household.
The child and dependent care credit is being increased for 2021 from the minimum 20% of qualified child and dependent care expenses to a new maximum of 50%. The ARPA also increased the amount of the qualifying expenses from $3,000 per qualifying child/dependent to $8,000. For two or more qualifying children/dependents, the amount goes from $6,000 to $16,000.
How will the payments impact my tax return?
In short, the maximum amount of the actual tax credit goes from $1,050 to $4,000 ($8,000 for two or more qualifying children /dependents). That’s a significant increase! The credit was made fully refundable for 2021, but there is not a provision for an advanced payment.
The phase out of this tax credit was also increased. Basically it starts to go down when adjusted gross income exceeds $125,000.
An important question…
Ok, here is an important question to take note of. As I mentioned above, the child tax credit was made fully refundable with half of it being paid out in advance payments during the rest of 2021. Advancing the money out certainly does the job of getting cash in the hands of taxpayers. Unfortunately, it can also cause some unintended consequences at tax time.
What I mean by that is some people count on using the child tax credit to pay taxes on April 15th. In receiving some of the credit in advance, that means that not all of it will be available when you settle up your tax debt. Yes, the increased credit amount will cover a good portion of what is advanced, but not all of it.
One more thing…
Another issue is that the credit is based off of your latest filed tax return. This could go as far back as 2019 if you have extended 2020. That could mean a bonus if you have added another child. It could also mean a larger tax bill if your situation has changed. This would be true if your income has increased past the phase-out point for receiving some or all of the credit.
Other family situations could also impact your rights to the credit, such as a divorce. If your ex-spouse claims the child for tax purposes and you received the advance payments, you will end up owing the advances back to the IRS.
What if I don’t want to receive the child tax credits in advance?
Based on some of the reasons outlined above and others, you may decide that you do not want to receive some the child tax credit in advance. That’s OK and may end up being some very prudent tax planning. The IRS has made an allowance for that. They have created a portal that you can use to turn off the advance payments. You can do this even if you have already started to receive some of them.
Starting in August, you can use the portal to stop the rest of the advance payments. In addition, you can make changes to the bank account for direct deposits or to your address for receiving checks.
What if I had a baby in 2021?
This question hits close to home with my second grandchild on the way this year! If you have added a child after filing your latest tax return, the government probably doesn’t know about it. It’s a little different if you have a new child that you will be able to claim as a tax dependent for 2021.
If you have received their social security number, you will be able to use the IRS portal to enroll your child in the advance payments. The date is still pending as to when this feature will be available inside the portal, but I anticipate it will be very soon.
Are the expansions of these child tax credits permanent?
The answer as of today is no. They are temporary and only apply to the tax year 2021 ending on December 31st. As with any tax law change, there is always a price to pay inside of the federal budget. The monies to fund these enhanced tax credits were passed as part of COVID-19 emergency relief.
That’s not to say that Congress may work to make these more permanent in the coming legislative sessions. Only time will tell. For now, I would only plan on these expanded credits to be in place for this current tax year (2021).
Summary (and a little bit of Disclaiming!)
The American Rescue Plan Act is a $1.9 Trillion economic stimulus and emergency relief package. These expanded tax credits can provide a significant amount of temporary financial resources to taxpayers. The intent is to bolster the economy around the nation continues to recover.
With this post, I have briefly tried to cover a very timely topic to most of our families, albeit a little bit technical. Sorry for going tax accountant on you! Everyone’s tax situation is different. I strongly encourage you to consult a tax professional in navigating any new law in regards to its impact on your personal tax situation.
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David W Clark, MPA, CPA
West Texas A & M University
