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Changes to Benefits for Dependents. Deduction for personal exemptions are suspended. For 2021, you cannot claim a personal exemption deduction for yourself, your spouse, or your dependents. For other purposes of the tax code, such as who is a qualifying relative for family credit purposes and eligibility for head-of-household status, the amount is $4,300.
Child Tax Credit and Additional Child Tax Credit. The American Rescue Act of 2021 makes the following changes to the Child Tax Credit. Effective for tax year 2021 only:
- The Child Tax Credit is increased to $3,000 per qualifying child,
- The Child Tax Credit in increased to $3,600 per qualifying child under the age of 6 at the end of the calendar year,
- The age limitation for a qualifying child is increased from age 16 to 17 (a child who has not attained age 18 as of the close of the calendar year.
- The full amount of the Child Tax Credit is a refundable credit if the taxpayer (or spouse if MFJ) has a principal place of abode in the United States for more than half of 2021 or is a bona fide resident of Puerto Rico.
Phaseout. The increased Child Tax Credit for 2021 over the prior law $2,000 amount phases out by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified AGI exceeds the following amounts. $150,000 MFJ, QW. $112,500 HOH. $75,000 Single, MFS. Once the increase in the Child Tax Credit is phase out, the $2,000 tax credit per qualifying child still applies until modified AGI reaches the threshold of $400,000 MFJ ($200,000 for other filing categories). After these thresholds are reached, the $2,000 tax credit is phased out by $50 for each $1,000 (or fraction thereof) that the taxpayer’s AGI exceeds the threshold.
Advance Payment. Advance payments of the Child Tax Credit are to be made during the 2021 calendar year in equal amounts. The annual advance payment amount is estimated by the IRS as being equal to 50% of the amount of the Child Tax Credit which would be treated as refundable credit for 2021. The IRS uses tax information from prior years to determine this advance amount. The advance payments are made during the period beginning July 1, 2021 and ending December 31, 2021.
The Child Tax Credit claimed on the tax return for 2021 will be reduced by the aggregate amount of advance payments received. If the aggregate amount of advance payments exceeds the credit allowed, the excess is added to the taxpayer’s liability for 2021. Use Part III, Schedule 8812, Credits for Qualifying Children and Other Dependents, to determine the excess, if any.
Safe Harbor. The excess amount may be reduced by a safe harbor amount if a taxpayer’s modified AGI does not exceed the following thresholds. $120,000 MFJ, QW; $100,000 HOH; $80,000 Single, MFS. The safe harbor amount is $2,000, multiplied by the excess of the number of qualified children taken into account in determining the annual advance amount over the number of children taken into account in determining the Child Tax Credit on the tax return.
Letter 6419. The IRS will mail a year-end summary statement (Letter 6419) to all taxpayers who have received advance Child Tax Credit Payments during 2021. This letter will be needed to complete their 2021 tax return and claim the remaining portion of the Child Tax Credit.
Credit for Other Dependents. A credit of up to $500 is available for each of your qualifying dependents other than children who can be claimed for the child tax credit. The qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien. The credit is calculated with the child tax credit in the form instructions. The total of both credits is subject to a single phase out when adjusted gross income exceeds $400,000 if married filing jointly and $200,000 for all other taxpayers. This means that you may be able to claim this credit if you have children age 17 or over, including college students, children with ITINs, or other older relatives in your household.
Social Security Number Required for Child Tax Credit. Your child must have a Social Security Number issued by the Social Security Administration before the due date of your tax return (including extensions) to be claimed as a qualifying child for the Child Tax Credit or Additional Child Tax Credit. Children with an ITIN cannot be claimed for either credit. If your child’s immigration status has changed so that your child is now a U.S. citizen or permanent resident, but the child’s social security card still has the words “Not valid for employment” on it, ask the SSA for a new social security card without those words. If your child doesn’t have a valid SSN, your child may still qualify you for the Credit for Other Dependents. This is a non-refundable credit of up to $500 per qualifying person. If your dependent child lived with you in the United States and has an ITIN, but not an SSN, issued by the due date of your return (including extensions), you may be able to claim the Credit for Other Dependents for that child.
Alternative Minimum Tax (AMT) Exemption Amount Increased. The AMT exemption amount is increased to $73,600 ($114,600 if married filing jointly or qualifying widow(er); $57,300 if married filing separately). The income level at which the AMT exemption begins to phase out has increased to $523,600 or $1,047,200 if married filing jointly. This means that far fewer taxpayers will pay the AMT.
Repeal of Deduction for Alimony Payments. Alimony and separate maintenance payments are no longer deductible for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before December 31, 2018, and modified after that date. Further, alimony and separate maintenance payments are no longer included in income based on these dates, so you won’t need to report these payments on your tax return if the payments are based on a divorce or separation agreement executed or modified after December 31, 2018.
Repeal of Deduction for Amounts Paid in Exchange for College Athletic Event Seating Rights. No charitable deduction shall be allowed for any amount paid to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.
Recharacterization of a Roth Conversion. You can no longer recharacterize a Roth conversion back to a traditional IRA. The new law was effective January 1, 2018 and forward. A taxpayer can still recharacterize Roth contributions to a traditional IRA if the recharacterization takes place before the due date of the taxpayer’s income tax return.