American Rescue Plan: Tax Relief for Families

Overview 

The American Rescue Plan expands the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), and the Child and Dependent Care Tax Credit (CDCTC) to provide more financial support for individuals and families throughout 2021. Details are below

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Child Tax Credit
Under the American Rescue Plan, the Child Tax Credit is enhanced in the following ways for 2021: 

  • The maximum credit is increased from $2,000 to $3,000, with an additional $600 for each child under the age of six, and extends the full credit to 17 year old children.

  • The increased amount phases out at $150,000 for married taxpayers filing jointly, $112,500 for heads of households, and $75,000 for individual filers. 

  • The CTC is fully refundable for 2021As a result, if the maximum CTC would be greater than your tax liability, you will receive the excess from the IRS. 

  • The IRS will send out funds on a periodic basis starting this July until December 2021, instead of making families wait until tax season to claim the creditFamilies should receive about half of the benefit of the CTC by December, and then they claim the rest on their 2021 tax return. 

  • The CTC is extended to families in Puerto Rico and other U.S. territories. 

Earned Income Tax Credit
The American Rescue Plan expands the EITC for taxpayers with no qualifying children for 2021 in the following ways: 

  • Lowers the minimum age to claim the EITC without qualifying children from 25 to 19 (for full-time college students who are not foster youth or homeless youth, the minimum age is 24) and eliminated the upper age limit so that people age 65 and over are eligible. 

  • Increases the benefit from $543 to $1,502. 

  • Increases the amount of the EITC for taxpayers without qualifying children by doubling the phase-in and phase-out percentages from 7.65 to 15.3 percent. 

  • Increases the income at which the maximum credit amount is reached to $9,820, and increases the income at which the phase-out begins to $11,610 for non-joint filers. 

  • Repeals a provision of law in order to allow a taxpayer to claim the childless EITC if they cannot claim the EITC for otherwise qualifying children because their children do not have valid Social Security numbers. 

  • Allows married but separated individuals to be treated as not married for the purpose of the EITC if a joint return is not filedThis applies to taxpayers who live with a qualifying child for more than half of the year but either do not live with their spouse or have a separation decree or agreement in place. 

  • Ensures that workers whose earnings have declined this year because of the pandemic do not see a reduced EITC as a result. 

Child and Dependent Care Credit
The American Rescue Plan makes enhancements to the Child and Dependent Care credit: 

  • For 2021, the Child and Dependent Care credit is fully refundable.

  • The credit is also fully available to families making less than $125,000—up from $15,000—and partially available to families earning between $125,000 and $400,000. 

  • The child care expense limit is increased from $3,000 for one child ($6,000 for two or more) to $8,000 for one child ($16,000 for two or more)The credit is based on 50 percent of the expense amount (an increase from 35.  percent). This means that families with adjusted gross income of less than $125,000 would be eligible for a $4,000 credit for one qualifying child and $8,000 for more than one qualifying child. The credit rate begins to phase out at $125,000 and plateaus at 20 percentbefore phasing out completely for families making $440,000.

  • The exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 for 2021.

More Information
For more information, please check the IRS’s website at https://www.irs.gov/coronavirus.