The third round of stimulus checks are on the way. The American Rescue Plan Act of 2021 is officially law, but this tax overhaul is more than just stimulus checks.
What do you need to know?
1. $1,400 stimulus checks
Similar to its predecessors, this law will provide direct payments to a certain group of taxpayers. But there are some differences between this round of stimulus and the two previous.
Quicker phaseout range
Eligibility is based on your adjusted gross income (AGI) from your most recent tax filing. If you’ve already filed 2020 taxes, your 2020 AGI is used. If you haven’t filed 2020 taxes, your 2019 AGI is used.
The American Rescue Plan has a much quicker phaseout range than previous versions. This means the amount of income separating an eligible individual from an ineligible individual is smaller.
- Single filers/married filing separately: under $75,000 = full amount. Phased out between $75,000 and $80,000. Above $80,000 = no payment.
- Married filing jointly: under $150,000 = full amount. Phased out between $150,000 and $160,000. Above $160,000 = no payment.
As you can see, there is not much room between being eligible for the full amount and not being eligible at all.
Additional opportunity to get the stimulus
What’s unique about this stimulus check is the two additional opportunities to get the full amount of stimulus.
If you are not eligible based on your 2019 AGI, but have yet to file your 2020 taxes, the law sets September 1, 2021 as the “Additional Payment Determination Date.” Provided you file your 2020 taxes before September 1, you will get your stimulus check (if eligible) after you file.
But wait, there’s more! The stimulus check is technically a 2021 tax credit that’s simply paid in advance. If your 2019 and 2020 AGI’s are too high, you still have a third opportunity to get the stimulus based on your 2021 AGI. So, you might not see any money now, but would see it on your 2021 taxes next spring.
Eligible individuals include dependents
Another major difference between previous rounds of stimulus is the definition of an eligible individual.
The new law expands the definition of eligible individual to include not only children under 17, but any other dependents the taxpayer might claim. This is good news for eligible taxpayers who have dependent children above age 17 or for those caring for elderly parents.
2. Expanded Child Tax Credit for 2021
Perhaps the most overlooked provision of the American Rescue Plan is the increased child tax credit. The amount of the child tax credit increases temporarily from $2,000 per child to $3,000 per child. In addition, the credit is increased to $3,600 per child under the age of 6 as of December 31, 2021.
However, this expanded child tax credit phases out for taxpayers at an amount of $50 per $1,000 of income above the following amounts:
- Single filers: $75,000
- Head of Household: $112,500
- Joint filers: $150,000
Secondly, the maximum age of an eligible child temporarily increases to 17 and under (as opposed to the current 16 and under).
Lastly, part of the 2021 child tax credit can be paid in advance. Namely, 50% of the credit can be paid in monthly installments from July to December 2021.
Let’s look at an example of a husband and wife with three children ages 5, 12, and 17 with an income of $140,000. In a “normal” tax year, they would be eligible for a $4,000 child tax credit (the 17-year-old would be ineligible). For 2021, they would realize a credit of $9,600 ($3,600 for the 5-year-old, and $3,000 each for the other two kids). Half of that ($4,800) would be paid in monthly installments of $800 between July and December.
Be aware—the expanded child tax credit can be “clawed back” on your 2021 taxes. Since the IRS will use your 2020 tax filing to determine eligibility, a higher income in 2021 can mean that you were paid a tax credit you actually weren’t entitled to. As a result, it would be “corrected” on your 2021 taxes.
While the American Rescue Plan Act of 2021 contains other provisions, the stimulus checks and expanded child tax credit will likely have the most impact on families.
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