Renner Business News; July 15, 2021—Justyna Zuchmanska, CPA

Recent changes in the American Rescue Plan Act of 2021 affect families with children. The tax changes increase the child tax credit, the child and dependent care credit and dependent care flexible spending account limits (DCAP). These are temporary changes and apply only for 2021.

Credit Increased for Certain Taxpayers

This credit is available to individuals with qualifying children under age 18 at the end of 2021 with a valid Social Security number.

  • The amount of the 2021 child tax credit increased for certain taxpayers from $2,000 to $3,000 (for children ages 6-17) and to $3,600 (for children age 5 and under).
  • Taxpayer income also determines the credit amount, which begins to be limited above certain thresholds depending on tax filing status. You may qualify for full credit if your modified Adjusted Gross Income is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers.
  • If your income is higher than the threshold, the credit begins to phase out and eventually gets reduced to the 2020 amount (usually $2,000 per qualifying child).
  • The credit is fully refundable (you can receive it if you do not owe taxes to IRS).
  • The IRS began issuing advance credit monthly payments July 15, 2021.
  • The monthly advance payments range from $166 to $300 per child.
  • You can check your eligibility, update your information and/or opt out using the IRS portal. If you qualify based on 2019/20 filed tax returns, you’ll receive a letter from the IRS with your benefit amount.
  • The advance payments will affect your 2021 tax return. If you receive advance payments, then you can only claim a partial credit on your tax return — which might cause you to owe more tax. Please check your 2021 withholding.

Dependent Care Credit Value Raised to $4,000

This credit is available to individuals with earned income who paid for qualifying child care (children under age 13) or dependent care expenses in 2021.

  • Previously, the credit was $3,000 for a single child, $6,000 for two or more children and became limited for income over $15,000.
  • For 2021, the credit increased to $4,000 (or maximum of 50% of $8,000 childcare expenses) for a single child and $8,000 (50% of 16,000) for two or more children; the income phase-out threshold increased to $125,000; and the credit is refundable.
  • Certain types of care, such as overnight camps or private kindergarten, do not qualify as expenses pertaining to this credit.
  • The pretax dependent care benefits you receive as an employee (see below) offset the dependent care expenses used to calculate the credit.
  • For additional information about child and dependent care credit, IRS publication 503 provides all the detailed definitions and expenses allowed.

Employees Can Contribute $10,500 Pretax to Dependent Care FSA

  • For 2021, the pretax amount that employees may contribute to a dependent care FSA temporarily increased from $5,000 to $10,500.
  • Plan participants can carry over unused amounts from 2020 and 2021 plan years.
  • A taxpayer is not entitled to a deduction or credit for the amounts excluded under a dependent care assistance program, including the Child and Dependent Care Tax Credit.
  • If you would like to make changes to your Dependent Care Flexible Spending account, please contact your employer or HR representative.

Taxpayers need to meet multiple criteria in order to qualify for Child Tax Credit or Child and Dependent Care Tax Credit (not all are listed above).

Please do not hesitate to contact us with questions regarding Child Tax Credit or Child and Dependent Care Tax Credit.

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