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Taxes: ARPA 2021 Expanded Tax Credits

By Anthony P. Curatola, Ph.D., and James W. Rinier, CPA, EA
November 1, 2021

The American Rescue Plan Act of 2021 expanded the child and dependent care tax credit and the earned income tax credit for the 2021 tax year.

 

The American Rescue Plan Act of 2021 (ARPA 2021), P.L. 117-2, that became law on March 11, 2021, provides substantial benefits to individual and business taxpayers. Changes to the child and dependent care tax credit (CDCTC) and the earned income tax credit (EITC) are two benefits that some individual taxpayers can enjoy. But the credits are amended for tax year 2021 only.

 

ARPA 2021 increased the upper percentage for claiming the CDCTC and made it refundable for some taxpayers. In addition, the EITC percentage and qualifying ages are increased, which makes it available to more taxpayers earning lower income.

 

THE CDCTC

 

The CDCTC is available for an eligible taxpayer to help pay for the care of a child younger than 13 years old or any dependent physically or mentally incapable of taking care of themselves (Internal Revenue Code (IRC) §21) so that the taxpayer can be gainfully employed.

 

Before ARPA 2021, for tax years 2020 and prior, the CDCTC was a nonrefundable credit—a taxpayer would only get the tax benefit of the credit up to the amount of tax owed with no tax refund for the unused credit. For taxpayers with an adjusted gross income (AGI) of $15,000 or less, the credit was equal to 35% of employment-related expenses up to $3,000 for taxpayers with one qualifying individual and $6,000 for taxpayers with two or more qualifying individuals.

 

Employment-related expenses are those costs that the taxpayer incurs to allow themselves (or the taxpayer’s spouse if filing jointly) to work or to look for work by paying for the care of the qualifying child to keep or find employment. These expenses can’t exceed the taxpayer’s earned income. The expense may not be considered related to work just because a taxpayer had the expense while working or looking for work. The expense must have been to enable the taxpayer to work or look for work to be allowed for the credit based on the facts and circumstances of each taxpayer.

 

The CDCTC was reduced one percentage point for each $2,000 of AGI or a portion of it above $15,000 to $43,000, but not below 20%. Thus, taxpayers with AGI more than $43,000 were still able to take the credit at least equal to 20% of the employment-related expenses.

 

CDCTC KEY BENEFITS

 

The CDCTC was expanded by ARPA 2021 with a few key benefits limited to only tax year 2021 (ARPA §9631). A special one-year tax amendment was added for any taxable year beginning after December 31, 2020, and before January 1, 2022 (IRC §21(g)). The CDCTC is fully refundable for tax year 2021, which means that the taxpayer can get a refund back from the Internal Revenue Service if this tax credit is more than the tax that the individual owes. Thus, there won’t be any unused credit.

 

Furthermore, the credit percentage increases from 35% to 50%, and the limit on employment-related expenses increases from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals. The credit is still reduced by one percentage point for each $2,000 of AGI or a portion of it, but not below 20%. Yet the credit-reduction limits for AGI increase from $15,000 to $43,000 for tax year 2020 to an AGI of $125,000 to $400,000 for tax year 2021. Taxpayers in tax year 2021 with AGI up to $400,000 instead of $43,000 will have the opportunity to have an increased percentage above the 20% lowest rate applied to their employment-related expenses for the CDCTC.

 

THE EITC

 

The EITC provides taxpayers with low to moderate income with a tax break by claiming a refundable tax credit based on a percentage of their earned income (IRC §32). Before tax year 2021, individual taxpayers with no qualifying children were eligible for the childless EITC (for a tax credit of 7.65%) if they were between 25 and 65 years old.

 

ARPA §9621 expands and strengthens the EITC in tax year 2021 for individual taxpayers with no qualifying children by reducing the age limitations and increasing the credit limit. A special one-year tax amendment was added for any taxable year beginning after December 31, 2020, and before January 1, 2022 (IRC §32(n)). The EITC increases from 7.65% to 15.3% for tax year 2021.

 

There’s no longer a maximum age to be eligible to claim the childless EITC, so individual taxpayers over age 65 may claim it. The minimum age was reduced from 25 to the following: 19 in general, 18 for a qualified former foster youth or a qualified homeless youth, and 24 for a specified student who isn’t a qualified former foster youth or a qualified homeless youth.

 

EITC ELIGIBILITY

 

Here are more specifics for childless EITC eligibility:

 

  • Age 19 is the minimum age, except if the individual is a qualified former foster youth, qualified homeless youth, or a specified student.
  • A qualified former foster youth is an individual who, on or after the date of turning 14 years old, was in foster care provided under the control of an entity administering a plan under Part B or Part E of Title IV of the Social Security Act, and that entity provides consent to disclose the status of the individual as a qualified foster youth.
  • A qualified homeless youth is an individual who certifies that he or she is either an unaccompanied youth who is a homeless child or youth or is unaccompanied, at risk of homelessness, and self-supporting.
  • A specified student is an eligible student (who meets the requirement of the Higher Education Act of 1965 and is carrying at least half the normal full-time load for any course of study that the student is pursuing per IRC §25A, the American opportunity and lifetime learning credits) during the last five calendar months of the year.

 

ARPA 2021 provides not only tax reductions for eligible taxpayers but also opportunities to get more refunds to provide funds to taxpayers needing assistance in tax year 2021. The most significant change is the increase of refundable tax credits where taxpayers can receive more refunds and not be stuck with unused tax credits with the CDCTC and the EITC.

 

© 2021 A.P. Curatola

 

Anthony P. Curatola, Ph.D., is editor of the Taxes column for Strategic Finance, the Joseph F. Ford Professor of Accounting at Drexel University, and a member of IMA’s Greater Philadelphia Chapter. You can reach Tony at (215) 895-1453 or curatola@drexel.edu.
James W. Rinier, CPA, EA, is the Vertex Fellow at Drexel University. He can be reached at jwr29@drexel.edu.  
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