The American Rescue Plan Act (ARPA), signed into law on March 11, 2021 had a significant impact on 2020 tax returns due to several retroactive provisions. The impact of ARPA will mainly be seen on the 2021 tax return, as many of the provisions were designed to provide tax relief to taxpayers dealing with the impact of COVID-19 during 2021. Here is a summary of the major tax provisions in the law that affect 2021 individual tax returns:
Recovery Rebate Credit
ARPA authorized a third round of economic stimulus payments. The amount of the payment is $1,400 per taxpayer plus $1,400 for each dependent claimed on the tax return. The advance payments of the 2021 recovery rebate credit were based on the information contained on the 2020 tax return (or the 2019 return if no 2020 return was filed at the time the payments were disbursed).
The income limit for the 2021 recovery rebate credit is $150,000 ($160,000 maximum) for MFJ filers, $112,000 ($120,000 maximum) for HOH filers, and $75,000 ($80,000 maximum) for any other filing status. The reduction of the rebate credit is calculated by a ratio and no rebate is available once a taxpayer reaches the maximum income limitation for their filing status. A taxpayer that did not receive the full amount of the third stimulus payment will be able to claim a refundable credit on their 2021 tax return.
Eligibility for the 2021 recovery rebate credit requires the taxpayer to be
- a U.S citizen with a valid Social Security Number
- who cannot be a dependent claimed on another tax return.
The same provisions apply to military families claiming a recovery rebate credit on their 2021 tax return as did with the 2020 recovery rebate credit.
Earned Income Tax Credit
For 2021, ARPA decreased the minimum age to collect EITC from 25 to 19 unless the individual is a full-time student (age 24) or a former foster child (age 18). There is no maximum age limit in 2021 (formerly 65) for taxpayers to claim the credit. The maximum amount of EITC for taxpayers without children has been increased from $543 in 2020 to $1,502 in 2021 allowing taxpayers to collect the credit at significantly higher adjusted gross income levels than previously allowed. Also, all taxpayers claiming EITC in 2021 will have the option to use their 2019 earned income to calculate the credit instead of their 2021 earned income if the 2019 amount is greater.
The final changes to the EITC are considered permanent changes and are in effect for 2021 and beyond. Under previous rules, the maximum investment income that a taxpayer could receive and still collect EITC was $3,650. This amount has been raised to $10,000 that will be adjusted in future years for inflation. This provision will benefit individuals that receive income from sources such as rental properties and Schedule K-1 (Form 1120-S). The second permanent change will be to allow MFS taxpayers living apart for the last six months of the year to be eligible for EITC.
Child and Dependent Care Credit
ARPA brought significant changes to the child and dependent care credit for 2021. The credit will be a refundable credit on the 2021 tax return, which will significantly help low-income taxpayers.
The second major change to the credit for 2021 is the amount of childcare expenses now eligible for the credit. The amount has been increased from $3,000 to $8,000 for one child and from $6,000 to $16,000 for more than one child. Also, the percentage of childcare expenses eligible for the credit has been increased from 35% to 50%, and the income phaseout amount has been raised from $15,000 to $125,000 and gets capped at 20% when AGI is $400,000.
The phase-out structure allows many more families to claim the maximum credit amount. Prior to 2021, the credit was decreased when the taxpayer’s income exceeded $15,000. In 2021, the credit will not be reduced until the taxpayer’s income reaches $125,000. This will allow every household with an income of $125,000 or less to get a credit worth 50% of their qualifying expenses spent on childcare.
The percentage will be gradually reduced from 50% to 20% for households with income between $125,000 and $185,000. It stays at 20% for families with an AGI from $185,000 to $400,000 and will be gradually reduced again from 20% to 0% for taxpayers with an AGI between $400,000 and $440,000. Taxpayers with an AGI above $440,000 will not qualify to claim the credit.
Credit for Sick Leave for the Self-employed
The sick leave benefits for the self-employed due to COVID-19 are extended through September 30, 2021. The days reset as of April 1, 2021. The previous qualification period was April 1, 2020, through March 31, 2021. This credit was reported on Form 7202 on the 2020 return and will also be available to self-employed taxpayers in 2021.
Credit for Family Leave for the Self-employed
The family leave benefits for the self-employed due to COVID-19 are also extended through September 30, 2021. The days also reset as of April 1. This credit was also reported on Form 7202 on the 2020 return and will also be available to taxpayers in 2021.
Premium Tax Credit
For 2020, taxpayers were not required to repay any advance premium tax credit that they would otherwise have had to repay due to their income being below 100% or above 400% of the federal poverty level for their family size. The IRS does not require a taxpayer to file Form 8962 on their 2020 tax return unless the taxpayer receives an additional premium tax credit.
For 2021 and 2022, the premium support has been adjusted to allow households with income above 400% of the federal poverty level to receive the Premium Tax Credit in the amount that health coverage exceeds 8.5% of their Household Income. Under the previous provisions, a taxpayer with income above 400% of the federal poverty level for their household size was not allowed any credit.