The American Rescue Plan Act, signed into law on March 11, 2021, hopes to provide a variety of tax and financial relief to Americans to help mitigate the effects of the COVID-19 pandemic. Among the many initiatives are advance tax credit payments that will be made to eligible individuals and parents.
Below are some answers to common questions about these payments.
What are the two types of payments?
Under the new law, eligible individuals will receive advance direct payments of two 2021 tax credits.
The first is a Recovery Rebate credit, and the direct payments to be made to Taxpayers are called “recovery rebates.” You may have also heard them be called “economic impact payments” or “stimulus payments” when they were issued in 2020.
The second is a Child Tax credit, in which the law allows for advance payments of this credit to eligible parents later this year.
How much are the recovery rebates?
An eligible individual is allowed a 2021 income tax credit, which will generally be paid in advance through direct bank deposit or a paper check or debit card. The full amount is $1,400 ($2,800 for eligible married joint filers) plus $1,400 for each dependent. These amounts have started being deposited into taxpayer accounts as early as March 12, 2021.
Who is eligible?
There are several requirements to be eligible to receive these payments, but the most important is the income reported on your most recently filed tax return. Full payments are available to those with adjusted gross incomes (AGIs) of less than $75,000 ($150,000 for married joint filers and $112,500 for heads of households). Your AGI can be found on page 1 of Form 1040 (line 11 of the 2020 return)
The credit phases out as your AGI increases and is reduced to zero for taxpayers with AGIs of more than $80,000 ($160,000 for married joint filers and $120,000 for heads of households).
Who isn’t eligible?
If your AGI is considered too high for the credit, you may not be eligible for the credit. Others who are not eligible include: nonresident aliens, individuals who are the dependents of other taxpayers, estates, and trusts.
The American Rescue Plan Act is an advance of your 2021 income tax credit, so if you are not eligible based on your most recently filed tax return but you are eligible when you file your 2021 tax return, you will claim the credit when you file the 2021 tax return. Examples of this could have been the birth or adoption of a child in 2021, or you were claimed as a dependent of another in 2019 or 2020 but not in 2021.
How much are the Child Tax credits and how has the Child Tax Credit changed from previous years?
Before this recent law change, the Child Tax Credit was $2,000 per “qualifying child.” Under the new law, the credit is increased to $3,000 per child ($3,600 for children under age 6 as of the end of the year). But the increased 2021 credit amounts are phased out at modified AGIs of over $75,000 for single taxpayers ($150,000 for joint filers and $112,500 for heads of households).
A qualifying child before the new law was defined as an under-age-17 child, whom the taxpayer could claim as a dependent. The $2,000 Child Tax Credit was phased out for taxpayers with modified AGIs of over $400,000 for joint filers, and $200,000 for other filers.
Under the new law, for 2021, the definition of a qualifying child for purposes of the Child Tax Credit includes one who has not turned 18 by the end of this year, so 17-year-olds qualify for the credit for 2021 only.
How are parents going to receive direct payments of the Child Tax Credit this year?
In the past, you would have to wait to file your tax return to fully benefit from the credit. The new law directs the IRS to establish a program to make monthly advance payments equal to 50% of eligible taxpayers’ 2021 Child Tax Credits. These payments will be made from July through December 2021.
What if my income is above the amounts listed above?
Taxpayers who are not eligible to claim an increased Child Tax Credit because their incomes are too high may be able to claim a regular credit of up to $2,000 on their 2021 tax returns, subject to the existing phaseout rules.
Contact your tax professional at Wegner CPAs for more information.
There are other rules and requirements involving these payments. This article only describes the basics. If you have questions on your eligibility for these or other tax credits, please reach out to your tax professional at Wegner CPAs.
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