Three Tax Credit Changes Under the American Rescue Plan Act

While there have been a number of COVID related legislation efforts to keep your eyes on these days, the recent 2021 American Rescue Plan Act, or ARPA, has made several significant developments to three key tax credits. From increased credits to changes in age requirements, see how the child tax credit, premium tax credit and earned income tax credit have all been enhanced due to the passing of the ARPA.

Child Tax Credit

As part of ARPA, the 2021 Child Tax Credit was increased and is fully refundable for most taxpayers. For 2021, the credit will be increased from $2,000 to $3,000 for qualifying children who are between the ages of 6-17 by the end of the 2021 tax year. The credit increases to $3,600 for children under the age of 6. To be a qualifying child, the requirements are as follows:

• The dependent child must be part of your family (son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of these people).
• The child must live with you for at least six months out of the tax year.
• The child cannot provide more than half of his or her own financial support which includes covering household expenses like clothing, rent, groceries, utilities, traveling costs. The child cannot file a joint return with someone.
• The child must be a U.S. citizen, U.S. resident alien, US. National or a resident of Canada or Mexico.

Previously, the credit was only issued for a child under the age of 17 at the end of the tax year. For 2021 the credit will include children who turned 17 during the tax year. For children ages 18 – 24 there will still be a $500 credit as an “other dependent”.

This increased credit will only be available for the 2021 tax year. The credit will start phasing out once adjusted gross income reaches certain levels based on a taxpayer’s filing status - $75,000 for single filers, $112,500 for head of household filers, and $150,000 for married filing jointly filers.

Advanced child tax credit payments will begin July 15, 2021, and will be paid based on your filed 2020 tax return. If a 2020 return has not been filed, your 2019 tax return will be the basis of the child tax credit a family would receive.

For non-filers, the IRS has opened an online portal to allow taxpayers to decide if they want to receive monthly payments for the period July – December 2021 or one lump sum payment of the child tax credit in 2022.

Another portal offers the opportunity to unenroll or view eligibility and payments.

Following is an example of how the child tax credit payments could be paid:

One cautionary note, though, is that the credit amount may change when you file your 2021 return. For example, if your child turns age 6 by the end of the 2021 tax year, your credit will go from $3,600 to $3,000. If your child turns 18 by the end of 2021, your credit goes from $3,000 to $500. If you have a full-time college student who turns 25 in 2021, then you will not receive any credit. An overpayment of the advance child tax credit might have to be paid back to the IRS. This repayment will not be required for filers with an adjusted gross income (or AGI) equal to or less than $40,000 for single filers, $50,000 for head of household filers, and $60,000 for married filing joint filers.

Premium Tax Credit

The Premium Tax Credit (PTC) is a refundable credit that helps eligible individuals and their families cover the premium costs of their health insurance they purchased through the Health Insurance Marketplace. To get this credit, the filer's income must be at least 100% but not be more than 400% of the federal poverty line (FPL) for a family of their size. This FPL is determined by the Department of Health & Human Services. The filers must have a filing status of Married Filing Joint and the filers cannot be claimed as another person’s dependent. Household income for the PTC is calculated by using the modified adjusted gross income for every member of your family filing a tax return. The family is made up of a taxpayer, taxpayer’s spouse, and all the “dependents” claimed on the taxpayer’s return. The modified AGI deducts from the tax return’s AGI foreign income, nontaxable Social Security benefit and any tax-exempt interest a taxpayer receives in that tax year.

Before the American Rescue Plan, households had to contribute around 9.83% of their income to pay for health insurance premiums to be eligible for the premium tax credit. The Plan temporarily increases the tax credit by moving this benchmark of eligibility for the credit to be households not having to pay more than 8.5% of their income. Prior to the ARP, taxpayers with income just over this 400% of FPL were not offered any subsidies. The ARP expanded eligibility by eliminating this 400% of FPL limit so the credit is offered to more people. For 2021 and 2022, any middle-income or upper-income individuals who purchase their own insurance coverage can receive premium tax credits if their premiums exceed 8.5 % of the overall household income. There also is a special rule in the ARP for recipients getting unemployment benefits. Their income is capped at a level not higher than 133% of FPL which offers them maximum subsidy amounts and PTCs along with no premium to be paid for health coverage.

To get the PTC a person cannot be eligible for a government program’s coverage like Medicare or Medicaid. Taxpayers also must pay any share of the marketplace insurance premiums that are not covered by advance credit payments. These advance payments are determined at the time a taxpayer applies for Marketplace coverage. The Marketplace will estimate the amount of the premium tax credit the taxpayer might get and ask the taxpayer to choose if they want to receive a portion of the estimated credit in advance. These advance payments are paid directly to the insurance company and lower the premiums the taxpayer would have to pay for their insurance coverage. If the credit calculated on your tax return is more than the amount of tax liability you owe, then the difference will be refunded. If the calculated tax liability is zero, then the refund will be the whole amount of the credit. That is what makes this credit “refundable.”

Taxpayers must notify the Marketplace if there is a change in their status or situation such as marriage, divorce, debt forgiveness, the birth or adoption of a child, or moving to a new address. If the advance payments of this premium tax credit end up being more than the allowed premium tax credit on the return, you generally must pay back the excess as additional income tax, subject to a repayment cap based on your household income. However, a special rule applies just for 2020 under ARPA. Under that rule, you can retain the benefit of the advance payments even if they exceed the PTC to which you are entitled.

Earned Income Credit

The Earned Income Credit is a refundable credit that helps low to moderate income working taxpayers under established income thresholds. Taxpayers can qualify for the credit if they have no children, but the credit increases based on number of qualifying children. To qualify for the credit, you must have proof of earned income, have a legal social security number, be a U.S. citizen or a resident alien for the whole tax year in which you want to claim the credit, and file as either single, married filing jointly, qualifying widow or widower, or as head of household. You cannot have a tax return filing status of married filing separately or have investment income like retirement accounts over $3,650. To get the credit, you must also have your main residence in the U.S. for more than half the tax year which includes the 50 states, the District of Columbia, and U.S. military bases but does not include Guam, the Virgin Islands, or Puerto Rico.

A comparison of how the EIC changed from the 2020 tax year to the 2021 tax year is shown in the tables below:

Even with no qualifying children, a taxpayer might still be able claim the EIC by meeting certain requirements. As can be seen in these charts, the American Rescue Plan increased the EIC for those without children from about $540 to $1,500 and increased the maximum earnings.

For 2021, the age restrictions were liberalized. Workers can now be 19 years old versus 25 years old. The maximum age limit was also taken away. A taxpayer's income should be under the threshold for the year, and they need to meet the following requirements to claim the EIC:

1. Reside in the U.S. for more than half the tax year,
2. No one can claim them as a dependent or qualifying child on their return,
3. For the 2020 tax year, the taxpayer must be at an age between 25-65 years old at the end of the tax year. For the 2021 tax year, the taxpayer must be at least 24 years old if they were a student for five months of the tax year, 18 years old if they were in foster care for any time after they turned 14 years old or were homeless in any taxable year, and at least 19 years old otherwise. For 2021, there is no maximum age limit for the Earned Income Credit.

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