Found Money? — Are you aware of how federal income tax credits may add to your refund? You may qualify if you have earned income and are also taking care of grandchildren or a disabled adult. Several provisions lift taxpayers out of poverty, but also help the middle class, especially retirees who were less able to make ends meet during the pandemic.
The financial contribution from retirees has been recognized in the American Rescue Plan Act (ARPA) of March 2021 with provisions enhancing the earned income tax credit, the child and dependent care credit, the child credit, and providing another rebate after two rebates in 2020. Aid is provided directly to the individuals through the tax system, rather than by government programs, which makes a difference as appropriations needed to spend the money have been slow in coming, especially in those state legislatures where the majority is controlled by the GOP. See if you may qualify based on the examples below:
Case #1 assumes a single taxpayer, age 68, who is retired and whose main sources of income are Social Security and a state retirement pension.
Case #2 assumes married, filing jointly (MFJ) taxpayers. The couple has their 11-year-old granddaughter living with them during all of 2021 (but not 2020) because the child’s parent is mentally incapacitated. The couple both receive Social Security, a state pension, and investment income.
Child and Dependent Care Credit (CDCC) — The CDCC is normally thought of as the “daycare” credit. It can be available when someone is caring for a young child or a disabled adult and the caregiver has earned income. The payments are income to the caregivers, but the payments also increase the eligible amount of the credit for the person(s) who claim the child or disabled person as a dependent.
The ARPA for 2021 only increases the amount eligible for the CDCC and raises the income level where the CDCC is decreased. The dollar limit on eligible expenses is increased to $8,000 (from $3,000) if there is one qualifying individual or $16,000 (from $6,000) if there are two or more qualifying individuals. The credit is half of the eligible expenses, so the maximum credit is $4,000 or $8,000. If the credit exceeds the taxpayer’s taxes due, it is refundable. The “phaseout” of the credit is quite high, starting when income reaches $125,000.
The CDCC does not apply to the Case #1 taxpayer because there is no dependent. In Case #2, our taxpayers pay for after-school care for their granddaughter. The taxpayers’ expenses exceed $8,000 in 2021 for her care. Their CDCC is $4,000 in 2021 (50% of $8,000). If the credit exceeds their taxes due for 2021, the excess amount is refundable.
Care of a spouse can qualify for CDCC. Caregiving expenses for a spouse who lives with the taxpayer (i.e., not living in a care facility) can also be eligible CDCC expenses. The person must be the spouse of the taxpayer, be physically or mentally incapable of caring for themselves, and live with the taxpayer for more than one-half of the year. For instance, in a case where a taxpayer’s spouse has dementia, the taxpayer’s daycare payments for that spouse could be eligible expenses.
Child Tax Credit — The child tax credit (CTC), not the same as the CDCC, is enhanced for 2021 only. The CTC is $3,000 per child ($3,600 for children under age 6 at the end of 2021). There are phaseouts (provisions that reduce the amount of the credit) of the CTC, but those do not start until income reaches $75,000 for single taxpayers, $112,500 for head of household filers, and $150,000 for MFJ.
The CTC does not apply to the Case #1 taxpayer because there is no dependent. In Case #2, our taxpayers may qualify for the CTC if they have earned income. They can claim the CTC when they file their 2021 tax return. Since their granddaughter is 11, their refundable CTC is $3,000.
Earned Income Tax Credit (EITC) — The EITC requires just that, earned income. In most situations, persons claiming the credit have dependent children. However, there is an EITC for persons without dependent children that has been enhanced for 2021 and later years. Seniors particularly benefit from this change.
Previous to 2021, taxpayers over 65, without dependent children, were not eligible for the EITC. However, the ARPA removed this barrier, so now seniors of any age can qualify for the EITC. The maximum earned income amount eligible for credit is $14,820 (MFJ) and $9,820 for others. There is a phaseout beginning at $16,610 (MFJ) and $11,610 for others.
The maximum credit for 2021 is $2,267 (MFJ) and $1,502 for others. This is a significant increase in these credit amounts over the previous maximum of $998 for MFJ and $543 for others (or over $0 for someone over 65). These amounts are refundable.
The EITC does not apply in Case #2 because the couple has no earned income. However, in Case #1 assume our taxpayer has $16,000 of earned income from a part-time job. She could qualify for $1,502 of refundable EITC versus $0 without the ARPA changes.
Recovery Rebate Credit — Officially this is an “economic impact payment” (EIP). In both cases the taxpayers are entitled to an EIP of $1,400 each. However, in Case #2, they may be entitled to an additional $1,400 for the granddaughter if she qualifies as their dependent. They would not have received this extra amount automatically because the dependent was not claimed on their 2020 tax return. The IRS looked at that return to determine their 2021 EIP. The couple in Case #2 can claim the extra $1,400 when they file their 2021 return.
Time Limited — The CDCC, EIP, CTC, and EITC all were enhanced by the ARPA. However, all but the EITC changes expire after 2021 unless they are extended by the pending Build Back Better legislation working its way through Congress. Stay tuned!
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