With the May 17 tax deadline looming for most Americans, the IRS on Tuesday sought to highlight some of the key provisions in the American Rescue Plan Act that will impact taxpayers.
The $1.9 trillion coronavirus aid package — which also included $1,400 stimulus checks — was passed by Congress and signed into law by President Biden earlier this year.
Some of the changes will benefit taxpayers filing their 2020 returns, while others won’t take effect until the 2021 tax year. They impact everything from unemployment compensation to child tax credits.
Changes for 2020 tax year filings
Some unemployment benefits not taxable
One of the major retroactive changes for 2020 that was part of the COVID-19 relief package is that most households won’t have to pay taxes on the first $10,200 of unemployment compensation. This is just in effect for the 2020 tax year, and only for filers whose modified adjusted gross income was below $150,000.
In their 2020 return, eligible taxpayers can subtract the first $10,200 in unemployment benefits from their total compensation. Only the difference in their taxable income should be included, according to the IRS.
In the case of a married couple who both received unemployment compensation, each spouse can subtract $10,200, the tax agency said.
For qualified taxpayers who already filed and reported their unemployment benefits, the IRS will automatically make the adjustment and issue a refund.
More details on the exclusion can be found here.
Excess advance premium tax credit repayment suspended
Taxpayers who bought their health insurance through a federal or state marketplace won’t have to report an excess advance repayment of the premium tax credit (excess APTC) for 2020, due to the requirement being suspended by the American Rescue Plan Act.
The IRS announced last month that taxpayers with excess APTC for 2020 also won’t have to file form 8962 or report excess APTC, and that the repayment amount will automatically be reduced to zero.
Anyone who already filed their taxes and repaid the advance premium tax credit will be reimbursed, the agency said.
More details on the suspension can be found here.
The IRS is urging people who already sent in their taxes for 2020 not to file amended returns or contact the IRS because the retroactive benefits will automatically be provided to eligible filers.
Changes for 2021 tax year
Expanded child tax credit and advanced payments
Under the American Rescue Plan Act, the child tax credit has been expanded for 2021 to as much as $3,600 per child ages 5 and under, and up to $3,000 per child between 6 and 17 years old. The original credit was $2,000 per eligible child.
The maximum amount is available to taxpayers with a modified adjusted gross income of $75,000 or less for single filer; $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,” the IRS’s website states.
Families, however, are eligible even if they have little or no income from their employment, business or other source, according to the tax agency.
The new law also makes the tax credit fully refundable and possible for families to receive up to half of it in advance from July through December 2021.
Advance payments will be determined through either 2020 or 2019 returns, depending on which is available. Because of that, the IRS is urging families to file their 2020 taxes as soon as they can, including those who normally don’t submit a return.
For faster delivery of any refunds and tax credit payments, taxpayers are encouraged to file electronically and pick the direct deposit option.
More information about advance child tax credit payments this year can be found here.
Child and dependent care credit increases
The amount of eligible expenses for the child and dependent care credit will also rise, and it will be refundable under the new law — but only for 2021.
This year, those who qualify can claim certain expenses of up to $8,000 for one eligible child, or $16,000 for two or more eligible dependents. Both amounts are more than twice that of prior limits.
This year, the top credit percentage of eligible expenses also goes up to 50%. That means the maximum credit someone could claim is $4,000 for one dependent, or $8,000 for two ore more dependents.
As was the case previously, the credit percentage goes down the higher a taxpayer’s earnings. However, more people will qualify for the new maximum because the adjusted gross income at which the rate decreases is ballooning from $15,000 to $125,000.
The credit rate plateaus at 20% for those earning between $183,000 and $400,000, at which point it’s phased out.
Another major change for 2021: the credit — for the time ever — is 100% refundable.
“This means that an eligible family can get it, even if they owe no federal income tax,” the IRS explained.
Earned income tax credit for the childless expands
More workers and couples without children will be eligible to obtain the earned income tax credit, a benefit meant to help many low-and-moderate income earners, including families, according to the IRS. On top of the maximum credit tripling for this group of taxpayers, it will be made available for younger workers and seniors — a first.
The earned income tax credit can be claimed by eligible workers who are at least 19 years old and have an adjusted gross income below $27,380.
Before, only those without dependents who were between 25 and 64 years old could claim the earned income tax credit.
For those who qualify, the maximum credit for 2021 climbed to $1,502, an increase of nearly $1,000 from the prior year.
More changes to the earned income tax credit
Other changes are coming to the earned income tax credit for 2021 and beyond.
For starters, the credit can be claimed by singles and couples with Social Security numbers, even in instances where their children don’t have them. In those cases, the filer would get the smaller credit available to workers without kids.
Additionally, spouses who are separated can pick whether they are treated as married for purposes of the tax credit. But several conditions must be met to qualify. These include separate principal homes from each other for at least half the year, and they have to have a qualifying dependent living with them for more than six months out of the year.
Finally, more workers and families with investment incomes will be able to get the credit. The current limit of $3,650 is set to expand to $10,000. And after this year, the maximum limit will be indexed for inflation.
More information on key changes to 2020 and 2021 tax provisions can be found here.