The American Rescue Plan Act of 2021 – or ARPA – includes expansion of the Child Tax Credit as well as the Child and Dependent Care Tax Credit.
Advance Child Tax Credit Payments
ARPA increases the amount of the Child Tax Credit for 2021, includes 17 year old dependents, makes it fully refundable, and allows for families to receive up to half of it in advance during the second half of 2021. Families can receive the credit even if they have little or no income from a job, business or other source.
ARPA increases the credit from up to $2,000 per child to as much as $3,000 per child for dependents ages 6 through 17, and $3,600 for dependents ages 5 and under.
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.
At higher income levels, the 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 credit is fully refundable for 2021 rather than the refundable portion being limited to $1,400 per child as in prior years.
From July through December 2021, up to half the credit will be advanced to eligible families with advance payments estimated from their 2020 return, or if not available, their 2019 return.
For the most up-to-date information on the Child Tax Credit and advance payments, visit Advance Child Tax Credit Payments in 2021.
Child and Dependent Care Credit Increased
ARPA increases the amount of the credit and eligible expenses for child and dependent care, modifies the phase-out of the credit for higher earners and makes it refundable.
The top credit percentage of qualifying expenses from child and dependent care is increased from 35% to 50% for 2021. Those eligible can claim qualifying child and dependent care expenses of up to:
- $8,000 for one qualifying child or dependent, up from $3,000 in prior years, or
- $16,000 for two or more qualifying dependents, up from $6,000 before 2021.
The maximum credit in 2021 of 50% for one dependent’s qualifying expenses is $4,000, or $8,000 for two or more dependents.
When determining the credit, employer-provided dependent care benefits such as those provided through a flexible spending account or FSA must be subtracted from total eligible expenses.
As in prior years, the credit percentage is reduced for higher earners, but under ARPA, more people will qualify for the new maximum 50% credit rate, since the adjusted gross income (AGI) level at which the credit percentage is reduced is raised substantially from $15,000 to $125,000.
Above $125,000, the 50% credit percentage is reduced as income rises, plateauing at a 20% rate for taxpayers with an AGI above $183,000 up to $400,000 at which point it is phased out above that level. It is completely unavailable for any taxpayer with AGI exceeding $438,000.
The credit is fully refundable for 2021. This means that an eligible family can get it even if they owe no federal income tax.
Dependent Care FSA Maximum Increased
The maximum amount of tax-free employer-provided dependent care benefits increased from $5,000 to $10,500 for 2021, so if your employer offers a dependent care FSA (and adopts this change), you can now set aside up to $10,500 instead of the normal $5,000.
Feel free to reach out to us with questions. Visit this blog post for more coverage of ARPA’s impact on individuals and businesses. You can also check our COVID-19 Resource Center for ongoing news and resources.