President Biden signed the American Rescue Plan Act on March 11, 2021. In addition to the stimulus payment, this plan contains some tax credits that should be considered by parents divorcing this year.
The Child Tax Credit
• The plan increases the Child Tax Credit from $2,000 to $3,000 per child – $3,600 for any child under the age of 6 – for tax year 2021 only.
• The plan provides for children under the age of 18 at year-end – as opposed to 17 under the current plan – to qualify for the credit for tax year 2021.
• For 2021 only, the credit is fully refundable, even to those with no taxable income • The 2021 credit starts phasing out for single filers at $75,000, for head of household filers at $112,500, and for joint filers at $150,000.
• The American Rescue Plan Act requires that half of the Child Tax Credit be paid in advance, meaning that payments for 2021 should be paid between July and December 2021 with six monthly payments. Eligibility for the credit will, in the first instance, be based on 2020 tax returns.
• This credit can be taken by the parent who claims the child(ren) as a dependent.
The Child Care Credit
• This credit – for a percentage of costs paid for childcare for a child under age 13 to allow a filer to work or seek work – is temporarily increased for 2021 to allow a tax filer to deduct up to 50%, depending on income, of childcare expenses up to $8,000 for one child and $16,000 for two or more children. This is a significant increase over the $3,000 for one child and $6,000 for two or more children under the present law.
• For 2021 only, the Child Care Credit is fully refundable, even for those who do not owe any tax.
• The phase-out for the Child Care Credit has been changed for 2021 only and goes to zero for those earning more than $440,000.
• This credit can be claimed by the parent with whom the child(ren) lived for a greater number of nights in the calendar year.
If you are in the process of negotiating a divorce agreement, do not forget to consider the tax credits for 2021.
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