In 2021, Congress passed the American Rescue Plan, a third stimulus bill in response to COVID-19. As we prepare for 2023, we do so with an understanding that many expanded tax deductions of that plan will change – most significantly the Child Tax and Dependent Care Credits. Here’s a quick rundown of what to expect:
Child Tax Credit
The Child Tax Credit was expanded in 2021 to cover more families, increase the total credit (to $3,000 or $3,600 dependent on child’s age), and allow up to 50% of the credit to be distributed as monthly sums.
What’s changing:
- The total credit will be up to $2,000 per child regardless of the child’s age. However, dependent children must be under age 17.
- Taxpayers are eligible for the full credit if their incomes are up to $400,000 (married, filing jointly) or $200,000 (single or head of household). Previously, filers would get the full credit if their incomes were below $150,000 (married, filing jointly), under $75,000 (single), or under $112,500 (head of household).
- The credit is partially refundable up to $1,400 if you don’t owe income taxes. Previously, you were eligible for the full credit (credit “fully refundable”) even if you didn’t owe income taxes.
Child and Dependent Care Credit
This credit was expanded for tax year 2021 and made partially refundable – meaning those who didn’t pay income taxes were eligible for the full credit.
What’s changing:
- Taxpayers can get up to 35% credit on $3,000 of childcare expenses for one child under age 13 or an incapacitated spouse or parent. This is a drop from a 50% credit on $8,000. Alternatively, taxpayers can receive up to 35% credit on $6,000 in care expenses for two or more dependents. This is a drop from 50% on $16,000.
- The credit amounts decrease if your Adjusted Gross Income (AGI) is over $15,000 (previously over $125,000).
Earned Income Tax Credit (EITC)
This tax credit was massively expanded under the American Rescue Act in terms of total amount and ages of eligible recipients.
What’s changing:
- Recipients without children must be at least 25 years old or under 65 years old to be eligible. Previously, those over 65 or between the ages of 19-25 were eligible.
- The credit is increased slightly to $6,935 for filers with 3 or more children (up from $6,728).
Regarding businesses, the American Rescue Plan provided emergency grants, lending, and investment to businesses, included the Employee Retention Credit. If you have any lingering questions on these items, please reach out to our business tax accounting specialists in Charlotte and beyond.