Three Refundable Tax Credits Impacting 2021 Tax Returns in the American Rescue Plan
P.S.A. about the Child Tax Credit, Earned Income Tax Credit, and the Recovery Rebate Credit
Just over one year ago, Congress passed one of the most ambitious economic recovery packages in U.S. history to help the country avoid falling back into a pandemic-driven recession—the American Rescue Plan Act of 2021.
Many of its provisions helped Americans last year, but it can also help working- and middle-class families this tax season. Although I had hoped that many such provisions would become more permanent staples of our tax code, like the expanded Child Tax Credit, I wanted to help raise awareness of changes to keep an eye on for 2021 tax returns.
As with prior articles, none of this information should be construed as tax advice; I am simply trying to raise awareness with this Public Service Announcement. Please ask your tax professional or use authoritative sources like the IRS website for more details before making any decisions impacted by this type of information.
A full disclaimer1 can be read at the bottom of this article.
Before we jump into the details, this is a list of the three tax credits I will discuss in this article, plus a link to the IRS website for more details on each credit.
Three Refundable Tax Credits
And for readers unfamiliar with refundable tax credits, here is a brief summary of how they work.
What is a Refundable Tax Credit?
Tax credits generally reduce the amount you owe the government. Normal tax credits can potentially reduce the amount you owe until you owe nothing—i.e., $0—but won’t reduce the balance beyond that. Refundable tax credits, on the other hand, can reduce the amount you owe beyond that point, which could mean you would be the one owed a refund.
For example, consider—all else being equal—a hypothetical taxpayer who would have owed the IRS $1,000, but then they remembered to claim an $1,800 tax credit for their qualifying three-year-old child on their 2021 tax return. If the credit weren’t refundable, they would then owe nothing instead of owing $1,000. However, since the Child Tax Credit is currently refundable, this taxpayer would expect a refund of $800.
In some cases, even individuals with little or no income, who might not otherwise be required to file income tax returns, could benefit from such refundable tax credits if they meet all the other requirements. Tax breaks for working people and getting cash to those who need it are key to what makes refundable tax credits so important.
Now that everyone is familiar with refundable tax credits, let’s look at some of the ones made possible by the American Rescue Plan.
Child Tax Credit
Millions of households received monthly advance payments of the Child Tax Credit beginning in July of 2021. Unfortunately, because the Build Back Better Act failed to pass in Congress, monthly payments are no longer being sent out, and the Child Tax Credit will likely function as it has in previous years beginning in the 2022 tax year unless Congress acts. But eligible families can still claim the remaining half of the expanded Child Tax Credit on their 2021 tax returns.
Families with qualifying children under the age of 18 at the end of 2021 would receive a total tax credit of $3,000 and should have received advance payments of this credit in monthly installments of $250. Similarly, families with qualifying children under the age of 6 should have been sent $300 advance payments for a tax credit worth $3,600 in total. A single parent with income above $75,000—or a married couple filing jointly with a combined income over $150,000—will not qualify for the full tax credit, though.
The remaining portion of the Child Tax Credit—which is generally half of the total amount, in the case of a household who received all six advance monthly payments throughout 2021—can be claimed on 2021 tax returns. For instance, a household which received six advance payments of $250 for a qualifying child under the age of 18 would then be able to claim the remaining $1,500 on their tax return.
The IRS website has more details on this and other subjects, including a FAQ section with answers to common questions about the Child Tax Credit. For more information about tax rules for children and dependents in these and other situations, see IRS Publication 929.
Earned Income Tax Credit
Another refundable tax credit, which can benefit those with and without children, is the Earned Income Tax Credit. Though this and the Child Tax Credit existed before the American Rescue Plan, they both were expanded with the passage of that Act. There certainly could be easier, more straightforward ways of getting cash to working families during these trying times, but while this is what we’ve currently got, I hope everyone who qualifies receives the benefits they deserve.
This tax credit has several requirements to qualify—which you can read more about in IRS Publication 596—but as the name suggests, these requirements primarily center around earned income. “Earned” income includes wages or salaries, net earnings from self-employment, and other similar but less common situations, such as strike benefits paid by a union.
Benefits of the tax credit phase in as earned income increases to a certain point, but they also decrease if adjusted gross income exceeds certain thresholds. There are also limits on how much investment income a taxpayer can have and still qualify for the tax credit. The table below from the IRS website shows a breakdown of these thresholds as well as the maximum amount of credit that can be claimed.
The Senate summary of the American Rescue Plan I’ve cited in other articles summarized the changes to the Earned Income Tax Credit (EITC) for the 2021 tax season well:
It will nearly triple the maximum EITC for childless workers, providing additional relief to more than 17 million of these individuals – most importantly, getting economic help to those working in essential but low-paid jobs on the frontlines of the pandemic.
As with 2020 tax returns, the 2021 tax year also allows for individuals to elect to use 2019’s earned income amounts for the purpose of calculating this tax credit. This might not benefit people in every situation, like if doing so puts the individual above the threshold to receive the credit, but it can potentially benefit people whose employment situations have changed since the pandemic began.
There are several details that can impact calculations, so definitely read the proper instructions carefully, use the IRS EITC Assistant, or consult your tax professional, but it is worth looking into whether changes to the Earned Income Tax Credit would impact your 2021 tax return.
Recovery Rebate Credit
The final refundable tax credit I want to discuss is the Recovery Rebate Credit. This credit relates to the Economic Impact Payments—which have also been known as stimulus checks and similar names throughout the pandemic—and is an option for individuals who did not receive the payments for which they qualified.
The IRS sent out three rounds of Economic Impact Payments, two of which were sent beginning in 2020, and the final one was sent in 2021. If you received all the checks for which you qualified, the Recovery Rebate Credit is not something you need to look into.
However, if, for example, you expected to receive all three payments, but only received some or even none of them, then it may be worth looking into the details of the Recovery Rebate Credit.
Because the Recovery Rebate Credit hinges on the Economic Impact Payments, I want to outline some of the benefits of, and requirements to qualify for, those payments. More details can be found here, but below is a summary.
First Economic Impact Payment
Tax Year: 2020
Amount paid per person: $1,200 ($2,400 for married couples)
Additional amount paid per dependent under 17 years of age: $500
IRS Notice Letter: 1444
Maximum AGI to still qualify for full payments: $75,000 ($150,000 for married couples filing jointly)
AGI at which payments are phased out to $0: $100,000 ($200,000 for married couples filing jointly)
Law which authorized these payments: The CARES Act of 2020
Second Economic Impact Payment
Tax Year: 2020
Amount paid per person: $600 ($1,200 for married couples)
Additional amount paid per dependent under 17 years of age: $600
IRS Notice Letter: 1444-B
Maximum AGI to still qualify for full payments: $75,000 ($150,000 for married couples filing jointly)
AGI at which payments are phased out to $0: $100,000 ($200,000 for married couples filing jointly)
Law which authorized these payments: Consolidated Appropriations Act of 2021
Third Economic Impact Payment
Tax Year: 2021
Amount paid per person: $1,400 ($2,800 for married couples)
Additional amount paid per dependent of any age: $1,400
IRS Notice Letter: 1444-C
Maximum AGI to still qualify for full payments: $75,000 ($150,000 for married couples filing jointly)
AGI at which payments are phased out to $0: $80,000 ($160,000 for married couples filing jointly)
Law which authorized these payments: American Rescue Plan Act of 2021
Note that only the third Economic Impact Payment relates to the 2021 tax year, but you can also look into the Recovery Rebate Credit on your 2020 tax return if you qualified for, but did not receive, either of the first two payments.
The IRS website once again has a thorough questions and answers section for the Recovery Rebate Credit, so if you aren’t sure if you received all of the Economic Impact Payments for which you qualified, it may be worth looking into the details for more information.
None of these provisions are ideal, in my humble opinion, but while it is all we have to work with currently, I just want to help everyone to receive the help for which they are eligible and that they deserve.
More from the Economic Justice and Progress Newsletter
If you want to read more about my thoughts about our pandemic relief efforts, my Coronavirus Relief & Economic Stimulus series is a collection of articles about the details of, and my opinions about, the relief bills which made these refundable tax credits possible.
I also plan to create a collection of my Public Service Announcements so keep an eye out for that in the future, and I encourage you to subscribe for free if you’d like to receive new articles as soon as they’re published.
In the meantime, feel free to share this article with anyone who might have questions about these refundable tax credits.
Also, if you have any questions, feel free to reply to this email if you are a subscriber, leave a comment on my website, or otherwise reach out to me and I can try to point you in the right direction. I am neither offering tax advice nor seeking new clients, and am mostly repeating publicly available information you can find on the IRS website, but I understand how overwhelming this process can be.
Take care, be excellent to one another, and stay safe out there.
Thank you for reading my newsletter and taking the effort to learn about making the world a better place. I look forward to hearing your thoughts on how we can make progress towards a more just economy.
-JJ
Disclaimer: This article, and others in the Economic Justice and Progress Newsletter, are written for educational and editorial purposes, and should not be considered accounting, tax, financial, or legal advice. I do not work for the IRS, nor am I in any way affiliated with the IRS; I am simply writing this to raise awareness of important issues. Please ask your tax professional or use authoritative sources like the IRS website for more details before making any decisions impacted by this type of information.