This page gives an overview of the most important federal tax changes for 2021 and tax provisions that are changing for calendar year 2021.
- Advance Child Tax Credit
- New Provisions from the American Rescue Plan Act of 2021
- Extender Provisions for Individuals
- New Provisions from the 2021 Consolidated Appropriations Legislation
- Self-Employed Credit for Sick and Family Leave
- Premium Tax Credit
- Extender Provisions for Businesses
- CARES Act Employee Retention Credit
Tax Provisions that Revert to Pre-2021 Rules
Under the American Rescue Plan Act of 2021 one half of the total child tax credit is being distributed to eligible taxpayers each month from July – December. The amount of each monthly payment will be $250 for each eligible child age 6 -17 and $300 for each child under age 6.
The advance payments will be calculated based on the taxpayer’s 2020 federal return or 2019 return if the 2020 return has not been filed at the time the advance payments begin.
The payment dates will be July 15, August 13, September 15, October 15, November 15 and December 15 for each monthly advance child tax credit payment.
Other facts about the Advance Child Tax Credit:
- They are not subject to offset.
- They are subject to garnishment
- A letter informing the taxpayer how much advance child tax credit they received in 2021 will be sent to the taxpayer by January 31, 2022.
- IRS has a page dedicated the Advance Child Tax Credit Payments
- IRS has a dedicated page that is devoted to FAQs about the Advance Child Tax Credit. This page is updated on ongoing basis as new information becomes available.
Online Tools for the Advance Child Tax Credit
Child Tax Credit Update Portal (CTCUP)
This IRS online tool will allow the individual to opt-out of receiving payments, update or add bank account information, as well as other information related to address, filing status, number of children and income for purposes of each month’s advance payment.
Functions available as of July 1:
- Elect to opt-out of receiving advance payments. This means that you will receive the full credit as part of your refund when you file your 2021 federal tax return.
- Able to view their eligibility, enrollment status and amount of monthly payment they will receive
- Can change or add bank account information for direct deposit of the advance payments
Cut-off Date making changes for each Advance Payment
The last day to make a change to their bank account information, unenroll from receiving the advance payments or make other changes to their information is as follows:
- August payment: August 2
- September payment: August 30
- October payment: October 4
- November payment: November 1
- December payment: November 29
Additional functionality will be added in August and September as follows:
- August – Address change allowed
- September – May make changes to filing status, income, number of children and may re-enroll if they opted out before the July 15 payment.
Individuals can access the tool as follows:
- Use their current Secure Access username and password if they have already set up an account through current Secure Access process
- Create a new account by authenticating themselves via ID.me
If the taxpayer cannot authenticate themselves there is a toll free number (800-908-4184) that will allow the taxpayer to opt-out and perform some of the options that are available in the online tool. They will not be able to update or change bank account information via the phone.
Allows the taxpayer to determine if they are eligible for an advance child tax credit payment by entering applicable information that they have entered on their 2020 return or would have entered if they had filed a 2020 return.
In order to determine eligibility, the tool will ask questions about the following:
- Last tax return filed
- Resident of a US territory
- Did they claim Child Tax Credit on their 2019 or 2020 return?
- Filing status
- Estimated AGI – If they do not know this then they will be asked questions about their sources of income
- Questions about children
Individuals who were not required to file a tax return in 2020 or 2019 may use this tool to prepare a simple return that will include all of their eligible children. The IRS then will determine if they are eligible to receive an advance child tax credit and the amount of each payment for the remaining months of 2021.
For more information, see the Child Tax Credit page in the Tax Resource Center.
New Provisions from the American Rescue Plan Act of 2021
The following provisions from the American Rescue Plan Act of 2021 are applicable for 2021:
Enhancement of Child and Dependent Care Tax Credit
For 2021, the child and dependent care credit will have the following changes:
- It will be fully refundable
- The maximum credit rate will increase to 50%
- The phase-out threshold is increased to $125,000 and taxpayers with AGIs over $500,000 do not qualify for the credit
- The amount of qualifying child care expenses is increased to $8,000 for one child and $16,000 for two or more children.
This is applicable for 2021 only.
Earned Income Tax Credit Changes
The following changes were made to the Earned Income Tax Credit:
Disqualified Investment Income
The maximum amount of investment income that a taxpayer can have before it disqualifies them from claiming EITC is increased to $10,000.
Prior Earned Income Election
For 2021, a taxpayer may elect to use their 2019 earned income if their 2021 earned income is less than their 2019 earned income for calculating the 2021 Earned Income Tax Credit.
Taxpayers with Children without SSNs
Taxpayers who have children without an SSN will be eligible for EITC without children.
Individuals with no Qualifying Children
For taxable years beginning in 2021 the following changes go into effect:
- Minimum age to qualify is lowered to 19
- Minimum age to qualify for specified students is 24 and 18 for former foster youth or qualified homeless youth
- Maximum age limit is eliminated
- The maximum credit allowable is increased to $1,502
Enhancement of Child Tax Credit
For 2021, the child tax credit will be:
- $3,000 per child over age 5 and $3,600 per child under age 6
- Credit is fully refundable
- Each child under age 18 will qualify for the credit
- Half of the credit will be eligible to be paid in advance
Phase-Outs for the Child Tax Credit
The increased child tax credit has two phase-outs:
1st Phase-Out – The credit begins to be reduced to $2,000 when AGI reaches the following:
- Single filers – $75,000
- Head of household filers – $112,500
- Married filing joint filers – $150,000
2nd Phase-Out – Remaining $2,000 credit will begin to be reduced to zero when the AGI reaches the following:
- Married filing joint filers – $400,000
- All other filing statuses – $200,000
Reconciliation of Advance Payments with Calculated 2021 Child Tax Credit
If the taxpayer receives advance payments of the child tax credit, then these payments must be reconciled with the calculated 2021 child tax credit that will be calculated on the 2021 federal return.
The result of the reconciliation will be one of the following:
- Refundable Credit – Calculated credit is greater than the advance payments received
- Additional Tax – Advance payments received are greater than calculated credit
Safe Harbor for Excess Advance Payments
For lower income families, there is safe harbor amount of $2,000 per child if the advance payments exceed the calculated credit.
Taxpayer does not have to repay an overpayment of up to $2,000 per child (Safe Harbor amount) as follows:
- Single – Full Safe Harbor amount when AGI is below $40,000. Phases out between $40,000 and $80,000.
- Married Filing Joint – Full Safe Harbor amount when AGI is below $60,000. Phases out between $60,000 and $120,000.
- Head of Household – Full Safe Harbor amount when AGI is below $50,000. Phases out between $50,000 and $100,000.
For more information, see the Child Tax Credit page in the Tax Resource Center.
Recovery Rebate Credit
The American Rescue Plan Act included a provision for an economic impact payment to be sent to the following taxpayers:
- $1,400 for each eligible individual ($2,800 for Married couples)
- $1,400 for each dependent claimed on the taxpayer’s federal return
These payments are advance payments of the Recovery Rebate credit. Since most eligible taxpayers received the full amount of economic impact payment earlier in 2021, for the vast majority of taxpayers this credit will be calculated to zero.
The credit will be calculated based on income, filing status, and the number of qualifying children reported on the 2021 federal return.
The Recovery Rebate credit begins to be reduced when the individual’s AGI reaches the following:
- $75,000 for Single filers (reduced to zero with income over $80,000)
- $150,000 for Married Filing Joint filers (reduced to zero with income over $160,000)
- $112,500 for Head of Household filers (reduced to zero with income over $120,000)
Taxpayers with the following circumstances will be eligible for this credit on their 2021 federal return:
- Taxpayers who did not receive any economic stimulus payment ($2,800 – MFJ or $1,400 for all other filing statuses)
- Taxpayer did not receive a $1,400 payment for all of their eligible dependents
- The taxpayer’s economic stimulus payment was limited based on their income on their 2019 or 2020 return and their 2021 income is below the income limit
Extender Provision Changes for Individuals
As part of the 2021 Consolidated Appropriations Legislation, the extender provisions that affect individuals were extended as follows:
Extender Provisions made permanent beginning calendar year 2021
- Eliminated the Tuition and Fees Deduction and replaced it by increasing the income limitation for the Lifetime Learning Credit. The income limitation increased from $58,000 to $80,000.
- Set the medical deduction floor at 7.5% of AGI on Schedule A
Provisions extended through 2025
- Ability to exclude the gain from income on the mortgage debt when a home is foreclosed on
- Employer credit for sick and family medical leave
Provisions extended through 2021
- Ability to treat mortgage insurance premiums as qualified mortgage interest on Schedule A
- Nonbusiness energy property credit that is claimed on Form 5695
- Credit for 2-Wheeled plug-in electric vehicles
- Credit for new qualified fuel cell motor vehicles
New Provisions from the 2021 Consolidated Appropriations Legislation
The following provisions go into effect in 2021:
- Businesses may deduct 100% of business meal expenses for 2021 and 2022
- Non-itemized charitable cash contribution deduction has been made permanent as well as allowing up to $600 for Married filing joint returns ($300 for single)
Self-Employed Credit for Sick and Family Leave
The American Rescue Plan made the following changes to this credit that is reported on Form 7202 (Credits for Sick Leave and Family Leave for Certain Self Employed Individuals):
- Extended the credit through September 30, 2021
- The 10 day maximum for sick leave is reset starting April 1, 2021. The original 10 day limit was applied April 1, 2020 – March 31, 2021.
- Family leave credit may be claimed for up to 60 days at $200 per day for a maximum credit of $12,000.
Explanation of the Self-Employment Credit for Sick and Family Leave
To be eligible, an individual must be conducting a business that qualifies as self-employment income and be eligible to receive qualified sick or family leave wages under the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act as if the individual was an employee.
Credit for Sick Leave
May claim up to 10 days if the individual was unable to perform services as a self-employed individual due to COVID-19 related reasons or the individual was caring for an individual because of COVID-19 related reasons.
Credit amount is:
- For individual themselves – $511 per day
- For caring for others – $200 per day
Credit for Family Leave
For 2021, a person may claim up to 60 days if the individual was unable to perform services as a self-employed individual because of certain COVID-19 related care they provided to a son or daughter under the age of 18 whose school or place of care is closed for reasons related to COVID-19.
Premium Tax Credit
For 2021 and 2022, expands the eligibility for and amount of premium tax credit by modifying the income eligibility criteria and the credit formula as follows:
- Eliminates the phase-out for households with annual incomes above 400% of the federal poverty level
- Increases the credit amount by reducing the percentage of annual income that eligible households would be required to contribute toward the insurance premium. The temporary percentages would range from 0% to 8.5% of household income.
For 2021, individuals who receive unemployment compensation would be deemed to have met the premium tax credit income eligibility criteria by disregarding household income above 133% of the federal poverty level.
Extender Provisions for Businesses
As part of the 2021 Consolidated Appropriations Legislation, the extender provisions that affect businesses were extended as follows:
Business provisions made permanent beginning with calendar year 2021
- Energy Efficient commercial buildings deduction
- Benefits provided to volunteer firefighters and emergency medical responders
- Railroad track maintenance credit
Business provisions extended through 2025
- 7 year recovery for motor sports entertainment complexes
- Empowerment zone tax incentives
- New Markets tax credit
- Work Opportunity credit
- Expensing rules for certain productions
- Exclusion for certain employer payments for student loans
- Extension of Carbon Sequestration credit
- Look-through rule related to controlled foreign corporations
Business provisions extended through 2025
- Credit for health insurance costs for eligible individuals
- Indian Employment credit
- Classification of certain race horses as 3 year property
- Accelerated depreciation for business property on Indian reservations
- Credit for electricity produced from certain renewable resources
- Extension and phase out of energy credit
- Alternative Fuel Refueling Property credit
- Production credit for Indian coal facilities
- Energy Efficient Home credit
- Extension of excise tax credits relating to alternative fuels
- Extension of Residential Energy-efficient Property credit and inclusion of biomass fuel property expenditures
- Mine Rescue Team Training credit
- American Samoa Economic Development credit
- Black lung disability trust fund excise tax
- Second Generation Biofuels Producer credit
CARES Act Employee Retention Credit
The CARES Act Employee Retention Credit was modified twice for 2021. First by the Appropriations legislation at the beginning of 2021, and then by the American Rescue Plan enacted on March 11, 2021.
Changes to the CARES Act Employee Retention Credit made by the 2021 Consolidated Appropriations Act
- Extended credit until June 30, 2021
- Credit is 70% of qualified wages (50% for 2020)
- Maximum amount of qualified wages is $10,000 per quarter (Maximum for 2020 is $10,000 for all of 2020)
- Gross receipts test is satisfied for any quarter in first half of 2021 in which gross receipts are less than 80% of the same quarter in 2019. There is an exception – If a business did not exist at the beginning of the same quarter of 2019, the same quarter in 2020 is substituted.
- For 2021, businesses also have the option to elect to satisfy the gross receipts test by looking at the immediately preceding calendar quarter and comparing that quarter to the corresponding quarter in 2019.
- Increases the threshold number of employees before a change in treatment arises to 500
- New rule for 2021 – Small employers (has fewer than 500 Full-Time Employees) may receive the credit in advance. Any advance payment will need to be reconciled with the actual credit amount for each quarter.
American Rescue Plan changes to CARES Act Employee Retention Credit
- Extended credit until December 31, 2021
- For period July 1, 2021 – December 31, 2021, the credit may be taken against the employer’s share of the 1.45% hospital insurance payroll tax instead of the 6.2% old age, survivor, and disability insurance.
- Allows a credit of up to $50,000 per calendar quarter to a startup business. A startup business is defined as a business established after February 15, 2020 with average annual gross receipts of less than $1 million.
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