America Rescue Plan Act: Tax Impact on Filing with Dependents

One of the most significant changes in the America Rescue Plan Act (ARPA) is to the Child Tax Credit. Below we discuss the changes and impacts to parents filing with dependents.

Child Tax Credit (CTC)

The ARPA increased the amount of CTC to $3,600 for children under 6 and $3,000 for children between 6 and 17. Previously the CTC stopped at age 16.

For tax year 2021, the CTC is reduced by $50 for every $1,000 in Modified Adjusted Gross Income above $150,000 for joint filers and $112,500 for head of household filers.

There are technically two phase out programs for 2021 tax year. Tax filers can opt for the more favorable result from either phase out option.

The ARPA also instructed the IRS to issue advanced payments of the CTC, based upon the most recent tax filing (e.g. 2019 or 2020). These advanced payments are scheduled to begin on July 1, 2021 and be approximately half of the CTC that the taxpayer is entitled to, using the most recent tax return information.

The payments are to be monthly, but if the IRS deems this not to be feasible, the ARPA has requested payments be made as frequently as possible.

Child and Dependent Care Tax Credit (CDCTC)

For Married Filing Jointly taxpayers with income for both spouses, the CDCTC may allow for deduction of childcare. The CDCTC can be worth up to 35% of the qualifying expenses for care, depending on Adjusted Gross Income.

The CDCTC allows for a taxpayer with one dependent to claim up to $4,000 in tax credits with $8,000 in qualifying expenses. A taxpayer with two or more dependents can claim up to $8,000 in tax credits with $16,000 in qualifying expenses. 

After an AGI of $125,000 the credit phase out begins and stabilizes at 20% tax credit for qualifying expenses. Taxpayers with an AGI above $500,000 are ineligible for the CDCTC.

Employer Provided Dependent Care

Employer‐provided dependent care assistance increased from $5,000 to $10,500 for 2021.

Please contact your CPA with questions about dependent tax credits and the ARPA.

This article is effective as of tax laws on March 18, 2021 and may not include subsequent tax law changes. Please consult a CPA at Delta Wealth CPA's & Advisors for tax guidance and advise.