Who would have thought that the IRS would be giving away money? Not long ago, the mere mention of those three letters struck fear into nearly everyone in earshot. I can’t help but think that some top advertising agency was hired a couple of years ago to re-brand the old menace into a grandfatherly benefactor, who reaches out to everyone, including the homeless, and especially adores the young children!
In any case, President Biden wants to give the IRS 80 billion dollars in order to do their job better, which entails a bit more than just being a philanthropy organization. But that being said, here are a few details regarding some of the new refundable credit provisions under the American Rescue Plan.
But first, a warning to expatriate readers of this article. Many, if not all of the new giveaways are targeted at Americans living in America, i.e. those living in the US for at least half of the year. Future guidance is needed to see which, if any of these provisions, will be expanded to include US citizens residing abroad.
The new law increases the amount of the Child Tax Credit to as much as $3,000 per child for dependents ages 6 through 17 (yes, it now includes 17-year-olds), and $3,600 for dependents ages 5 and under. The credit will now also be fully refundable and it will be possible for eligible families to receive up to half of the available credit, in advance, during the last half of 2021, based in the 2020 return, or the 2019 return, if 2020 is not yet available. In addition, families will now be able to get the credit, even if they have little or no income from a job, business or other source of earnings.
The maximum credit is available to taxpayers with a modified AGI of $75,000 or less for singles, $112,500 or less for heads of household and $150,000 or less for married couples filing a joint return and qualified widows and widowers. Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every $1,000 in modified AGI.
Eligible families will be able to choose to decline receiving the advance payments. And families will also be able to notify the IRS of changes in their income, filing status or number of qualifying children. Details are expected to be available in the next few weeks.
The new law also increases the amount of the credit and eligible expenses for child and dependent care, and also makes this credit fully refundable. For 2021, the top credit percentage of qualifying expenses is increased from 35% to 50%. Eligible families will be able to claim qualifying child and dependent care expenses of up to $8,000 for one qualifying individual (up from $3,000 in prior years), or $16,000 for two or more qualifying individuals (up from $6,000.) This means that the maximum credit in 2021 of 50% for one dependent’s qualifying expenses is $4,000, or $8,000 for two or more dependents.
The phase-out of the credit for higher earners is also being modified, to a starting point of $125,000, with the credit gradually reduced from there, up to an AGI of $438,000. Note that when figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses.
For 2021 only, the Earned Income Tax Credit (EITC), which is also fully refundable, which has already helped many low- and moderate-income workers and working families, will be available for more childless workers and couples. This is because the maximum credit is nearly being tripled for these taxpayers and is, for the first time, being made available to both younger workers and senior citizens.
In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don’t qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.
