Small Business Taxes & Management^TM--Copyright 2022, A/N Group, Inc.

Introduction

The American Rescue Plan enacted in 2021 made a number of changes to the tax law for 2021 individual and business tax returns. Some of the changes don't affect a large number of taxpayers, some do. The discussion below deals with tax changes of significance to individual returns. Keep in mind that some of the changes only apply to your 2021 return. While many of these changes are handled almost automatically if you're using software to prepare your return, you still need to use care in inputting your data.

Child Tax Credit

This is certainly one of the more significant changes. The credit was expanded to cover dependents as old as 17 (i.e., those who have not reached age 18 by the end of the year) and made the credit fully refundable for most taxpayers. (A credit is called refundable if, after reducing your tax liability to zero, the remaining credit is refunded to you in the form of a tax refund. Only a select number of credits are refundable.) In addition, the credit is now $3,000 per child, increasing to $3,600 per child who is under age 6 at the end of the tax year.

The phase-out ranges have also changed. The maximum credit phases out at $75,000 for singles, $112,500 for heads of households and $150,000 for married couples filing joint and qualified widows and widowers. Above these amounts the credit in excess of the $2,000 amount (e.g., either $1,000 or $1,600 phases out).

The credit is trickier this year because of the advanced payments made in the second half of 2021. The advance credits were based on information the IRS had when they mailed out the payments. That means you'll have to reconcile the payments you received with what you're entitled to. You do that on Schedule 8812. But low- and moderate-income taxpayers are generally protected from this repayment requirement. Repayment protection is limited to $2,000 per child.

If you didn't qualify for the CTC in 2021 but received advance payments you may have to repay part or all of them. But low- and moderate-income taxpayers are generally protected from this repayment requirement. Repayment protection is limited to $2,000 per child. No repayment is required for taxpayers whose modified adjusted gross income is at or below:

• Married filing jointly and qualified widows and widowers: $60,000;
  
• Head of household: $50,000;
  
• Everyone else: $40,000.

If you got the advance credit you should have received Letter 6419 from the IRS. You'll need that to reconcile the credit on your return whether you use a paid preparer or prepare the return yourself.

Child and Dependent Care Credit

The American Rescue Plan increased the amount of the credit and eligible expenses for child and dependent care, modified the phase-out of the credit for higher earners and made it refundable. For 2021, the top credit percentage of qualifying expenses increased from 35% to 50%. In addition, eligible taxpayers 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.

As a result of these changes 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 figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending arrangement (FSA), must be subtracted from total eligible expenses.

The credit percentage phases out at higher incomes, but the phaseout amounts are more generouse than in the past. The phaseout now begins at $125,000 (up from $15,000) of adjusted gross income (AGI). The 50 percent credit is gradually reduced to 20 percent at an AGI of $183,000, then remains level until reaching $400,000 and then is phased out again until it is completely eliminated at $438,000. In addition, for 2021 the credit is fully refundable.

Childless Earned Income Tax Credit

For 2021 only the ARP has expanded the Earned Income Tax Credit (EITC) to encompass more workers without children. The EITC is available to low- and moderate-income taxpayers who work but whose income is below a certain threshold. The credit is fully refundable. In addition, the credit has been expanded in several other ways so that more individuals are covered. The maximum credit is nearly tripled and is, for the first time, made available to both younger workers and senior citizens.

In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Homeless youth and former foster youth may qualify if they are at least age 18.

On the other hand, students under age 24 usually don't qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.

Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.

Changes expanding the EITC for 2021 and future years include:

• Singles and couples who have Social Security numbers can claim the credit, even if their children don't have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn't qualify for the credit.
  
• More workers and working families who also have investment income can get the credit. Starting in 2021, the limit on investment income is increased to $10,000. After 2021, the $10,000 limit is indexed for inflation, with the 2022 limit rising to $10,300. Before 2021, the limit was $3,650.
  
• Married but Separated spouses can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for the last six months of the year and must have a qualifying child living with them for more than half the year.

Charitable Contributions

There are two changes of importance here. First, if you can't itemize, you can still claim a $600 (married, filing joint; $300 for all others) charitable contribution deduction, but only for cash contributions. Most charitable organizations qualify, but not donor advised funds or supporting organizations. Keep in mind that the usual recordkeeping rules apply.

If you itemize there is generally a limitation on how big a deduction you can take. For most organizations cash contributions can't exceed 60 percent of your AGI. Any excess can be carried forward. That rule has been dropped in 2021 and you can deduct up to 100 percent of your AGI.

Tuition and Fees Deduction

Unfortunately, this deduction is no longer available. However, the income limit for the Lifetime Learning Credit was increased. For 2021 the credit is phased out for married couples filing jointly whose modified AGE is between $160,000 and $180,000; for other taxpayers the phaseout starts at $80,000 and is fully phased out at $90,000.

--Last Update 01/10/22