The American Rescue Plan Act (ARPA) geared towards assisting both individuals and businesses was signed into law on March 11, 2021 by President Biden. It includes new stimulus payment amounts that have an increased amount for every child/dependent. Furthermore, special relief – exempting unemployment income claimed on tax returns – is provided for families struggling with unemployment as a result of the COVID-19 pandemic. But what does it mean for parents with dependents, and how can it help families to survive these unprecedented times? Read on to learn how the American Rescue Plan Act impacts the child tax credit, child and dependent care credit, and more.
Child Tax Credit
The new reforms include a change to the child tax credit for 2021 only. Before the American Rescue Plan Act, the child tax credit was set at $2,000 per qualifying child. If filing jointly, the credit was deemed partially refundable with a phase-out starting at $400,000. However, under the new program, the amount of child tax credit has been increased to $3,600 for each qualifying child under the age of 6 or $3,000 for each qualifying child under 18 by the end of 2021. Furthermore, the credit is completely refundable.
Income phase-out for the increased credit amount starts at $150,000 for joint filers and $75,000 for single filers. The option to receive temporary, advanced monthly payments accounting for 50% of the child tax credit for 2021 is provided to further assist taxpaying parents and guardians.
These advanced payments are expected to begin July 2021. The amount will be based on the income of the previous tax year (2020) if filed. However, keep in mind that if you receive an excess amount of the allowable credit, you must repay the excess funds when you file tax returns for the 2021 year. Taxpayers can opt out of the advanced payments online.
Child and Dependent Care Credit
Childcare is costly and can put an additional burden on parents and guardians whether they have job security or are unemployed. This is particularly true during the ongoing economic situation causing families to struggle with finances. Fortunately, the American Rescue Plan Act has increased the amount for child and dependent care credit to provide relief to parents.
Previously, the set limit for the childcare expense amounted to $3,000 for a single qualifying child and $6,000 for more than one child. As a result of the latest reforms, the expense limit was increased to $8,000 for a single child and $16,000 for more than one qualifying child in 2021 only. The credit amount depends on 50% of the expense amount when your adjusted gross income is less than $125,000. The percentage phases down, but not below 20%, for a maximum credit limit of $4,000 for a single child and $8,000 for multiple qualifying children. It must be noted the credit begins to phase out for joint filers when their adjusted gross income is $400,000 and is completely phased out at $440,000.
Another important reform entails the refundable status of the child and dependent care credit. Previously, the credit was deemed nonrefundable. However, under the American Rescue Plan Act, child and dependent care credits are refundable for 2021 only.
Third Round Stimulus Payments
If you are a taxpayer and meet the income threshold, you may be eligible for the third round of stimulus payments. For those who have filed tax returns for 2020, the payment will be based on the income for 2020. However, if you have not filed your tax returns for the last year, the payment amount will be based on your 2019 income. Keep in mind that to receive full payment, an eligible individual’s income must not exceed $75,000. For those filing jointly, the income must not exceed $150,000.
Every eligible individual, including qualifying children/dependents, will receive $1,400. It must be noted that these amounts are not the same as the amounts paid in previous rounds of stimulus payments. The increase in amount can be helpful for parents, especially those with multiple children.
The number of families struggling with unemployment has surged amid the COVID-19 pandemic. Fortunately, this added package features unemployment benefits focused on those facing job loss and is retroactive to the 2020 tax year only. If your 2020 modified adjusted gross income is less than $150,000, then unemployment compensation amounting to up to $10,200 may be excluded from the taxable income.
Married taxpayers can also exclude an unemployment compensation of up to $10,200 for each individual. The IRS has said it will send refunds automatically to taxpayers who have already filed their 2020 tax returns and paid tax on unemployment income. However, taxpayers should consider preparing an amended tax return to be sure all benefits are captured from the lower adjusted gross income amount resulting from the unemployment exclusion.
The Bottom Line
The current aid program is all-inclusive and designed to provide relief to individuals, families, and even businesses that continue to be impacted by the COVID-19 pandemic. The program takes a multifaceted approach to provide aid and help citizens through these challenging times.
If the pandemic has impacted you, make sure you take the time to learn about different options to gain maximum benefits from aid and relief packages for yourself and your family. The American Rescue Plan Act can help alleviate the burden of childcare expenses and unemployment for parents.
If you are unsure about your eligibility status or want to learn more about ARPA, please contact our tax professionals at firstname.lastname@example.org or toll free at 844.4WINDES (844.494.6337).