Earlier this year the Biden administration passed the American Rescue Plan. There was a lot in that American rescue plan one of them that got a lot of mention early in the year was the last stimulus that “everybody” received, or many people received. The other big changes that came in there are somewhat of an anomaly in the tax world because there are changes that are specific to only 2021 at this time, which is not something we normally experience or deal with, normally we get changes for several years.
The big changes are the child tax credit, the child care credit, and even the earned income credit for those that qualify. The big changes in these the child tax credit was increased by $1000 for kids six years old to age 17, for those that are under the age of six it was increased to $3,600 per kid. It’s a pretty substantial amount of money added on especially if you have multiple children and you’re under the adjusted gross income limit, for a single filer or 75,000, for a married filing jointly it’s 150,000. There is a phase-out so it doesn’t just drop off your credit would be reduced if you were over that amount of adjusted gross income. The other thing to be aware of with the child tax credit is, included in that (The American Rescue Plan) they also said we’re going pay some of that forward in 2021. Rather than waiting until April of 2022, when you do your taxes for 2021, to recognize all that credit they’re going to take half of what you’re eligible for, based on your 2020 taxes or 2019 if you haven’t filed 2020, and they’re going to send you a monthly payment similar to the way you probably received your stimulus. You do have the option to opt-out. There’s going to be, if it’s not already up, a portal for you to be able to opt-out of that payment if you would like. Keep in mind this is not something you’re not going to receive. If you think you may not be eligible for it in 2021 taxes then maybe it’s smart to hold off but if you’re likely going to be eligible for it you’re going to either get it in a monthly payment or you’re going to get it and recognize it in a larger refund. It’s all the same at the end of the day, but you really need to understand your taxes. That’s something we can help you with from a high level we are NOT tax accountants, but we can help you navigate some strategies to look at.
The other big change which for some people could be pretty substantial is the child care credit. In the past, this was not as lucrative of credit for the amount of money that most of us pay for childcare, but for 2021 they will cover up to 50% of $8,000 in expenses for one child or 50% up to $16,000 of expenses for two children. Yet again there is a phase-out. The phaseout is stair-stepped a little differently because it adjusts the percentage that it will cover.
Again, you want to be very clear on what your adjusted gross income is. If you’re looking at your 2020 taxes I believe it’s line 11 it shows your adjusted gross income, it’s towards the bottom of the first page of your 1040. You can find a lot of the phase-outs and things like that online on the IRS website or give us a call. We can help you try to navigate and understand how this may impact you. If you make changes to your withholdings or how you’re handling your taxes for 2021 you want to be aware that these are only 2021 changes as of right now, so whatever you do in your 2021 taxes make sure you revert them back in 2022 if these changes don’t move forward.
The last change that was made was another credit that was impacted, the earned income credit. There was less major changes with this one it’s really for your lower-income earning individuals. The phaseouts are fairly low but there was an adjustment to these. The big one there is that now it’s also eligible for people that are married filing separately.
The other big change on the child tax credit and on the child care credit is they have changed to more fully refundable whereas before it only would wipe out if you owed taxes. That’s another big thing because let’s say you owe $0 taxes or your taxes are wiped out with what you’ve paid in and you still have these credits that you can receive, for the most part, you’re going to receive 100% of those that you’re eligible for just in a refund. Pretty substantial changes for 2021!
If you want more information about how this may specifically impact your situation or strategies on how to handle this please don’t hesitate to reach out to Next Step Financial Transitions we’d love to speak with you.