May 01, 2021
By Brandon Yuska, CPA Principal at Terry Lockridge & Dunn
The recently passed American Rescue Plan Act contains several tax breaks for you and your family. This article discusses the new child tax credit and the child and dependent care credit in further detail.
The new child tax credit (CTC) is currently for 2021 only.
- The CTC for 2021 increases from $2,000 to $3,000 for children ages 6 to 17 and $3,600 for children ages 5 and under. The amounts are based upon the child’s age on December 31, 2021.
- To receive the full tax credit your adjusted gross income (AGI) must be under $75,000 (Single), $150,000 (Joint), or $112,500 (Head of Household). This credit is subject to a phase out. For every $1,000 a taxpayer earns over the AGI limit, their credit is reduced by $50 per child.
- The big difference from the previous year is that half of the credit will pay out monthly from July through December. In each of those months, the IRS will deposit the CTC into your bank account - $300 for each child under age 6 and $250 for each child ages 6-17. The remaining half of the credit will be an adjustment on the 2021 income tax return. For dependents over 18, the credit will be $500 total.
- The IRS is setting up a portal for taxpayers to communicate changes during the year due to the birth of a child, a divorce, change in bank account or other pertinent matters. It is expected to be operational by July 1, 2021.
- If your income is above the aforementioned thresholds, you can still receive the existing child tax credit that was established in the Tax Cuts and Jobs Act of 2017. It is $2,000 per child under age 17 if your income is less than $200,000 (Single, Head of Household), or $400,000 (Joint).
Child and dependent care credit
If you and your spouse work and have children in daycare, or have an adult that you care for, you may be eligible for a larger tax credit in 2021.
- You can now spend up to $8,000 in dependent care expenses for one qualifying dependent and get a 50% tax credit. This results in a maximum credit of $4,000 (up from $1,050).
- If you have more than one qualifying dependent, you can spend up to $16,000 in dependent care expenses and get a 50% credit. This results in a maximum credit of $8,000 (up from $2,100).
- To receive the full tax credit, your adjusted gross income must not exceed $125,000.
- Dependents can include people of all ages, not just kids, as long as they meet the dependent qualifications.
Please feel free to reach out to Brandon at firstname.lastname@example.org, or any of the accountants at Terry Lockridge & Dunn to discuss your specific circumstances. They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.