The information in this article was last updated on May 14, 2021. This article relates to the tax laws enacted during the COVID-19 pandemic. These laws may have expired or reverted to their original state.
To help Americans facing hardship due to the covid-19 pandemic, a third economic relief package called the American Rescue Plan was signed into law on March 11, 2021. Certain provisions could have an immediate effect on your tax situation now or become a factor when you file your tax return next year. Here is a look at the most important changes that apply to individual taxpayers. Note: Most of these changes will not affect how you file your taxes for 2020 (returns being filed now, in 2021).
At a glance:
- The deadline to file and pay federal individual income taxes has been postponed to May 17, 2021.
- The third stimulus payment is worth $1,400 per qualifying individual. Dependents can also receive the full $1,400, no matter their age.
- Individuals who received unemployment in 2020-2021 will not be taxed on their first $10,200 of unemployment benefits.
- The Child Tax Credit for 2021 increased to $3,000 for kids age 6-17. The credit amount is $3,600 for kids under age 6.
- The Earned Income Tax Credit for single taxpayers nearly doubled. The minimum age to claim the EITC was lowered to 19.
- The Child and Dependent Care Credit increased to 50% of expenses. Eligible filers can claim up to $8,000 for one child or $16,000 for more than one child. The credit will be refundable for 2021.
A portion of 2020 unemployment benefits are tax-exempt
If you received unemployment benefits in 2020 and your AGI is less than $150,000 (for single and married filers), you will not be required to pay income tax on the first $10,200 you received for unemployment. For married couples filing jointly, the first $20,400 is exempt.
TaxSlayer is updated for the unemployment tax exemption. Anyone who is eligible and does not have an accepted return prior to March 19, 2021 will automatically see the changes reflected in their refund or amount due.
If you’ve already filed your 2020 return, the IRS will calculate the exemption and adjust your account accordingly. They will send any overpayment amount directly to you or apply it to any outstanding taxes owed.
Update (as of May 14, 2021): The IRS has begun correcting returns for eligible taxpayers who paid taxes on 2020 unemployment compensation before it was excluded from taxable income by the American Rescue Plan. They are making adjustments in phases, beginning with single taxpayers with very simple tax returns (no dependents, no refundable credits). Then, they will adjust returns for taxpayers with more complex situations.
If you are owed a refund after the correction and you provided direct deposit info when you filed your return, the IRS will deliver your payment by direct deposit. If they don’t have bank information for you, the IRS will send your refund by mailed check.
According to the latest press release from the IRS, “Corrections to any Earned Income Tax Credit (EITC) without qualifying children and the Recovery Rebate Credit are being made automatically as part of this process.” See the complete release for details.
In an earlier release, the IRS insisted that taxpayers who have already filed a 2020 tax return do not need to file an amended return “unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.”
The tax filing deadline was extended to May 17
The IRS has officially announced that they are automatically extending the federal tax filing deadline to May 17, 2021. This means you have an extra month to file and pay federal income taxes if you need it. But, they are still urging taxpayers to consider filing as soon as possible, especially those who are expecting refunds. According to the IRS, “Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers more quickly receive any remaining stimulus payments they may be entitled to.”
A third round of stimulus checks will be delivered
The third stimulus check is worth up to $1,400 per person, plus $1,400 for each dependent. Single tax filers who earn $75,000 or less are eligible for the full amount. The stimulus phases out for single filers at $80,000. Couples who file jointly and earn $150,000 or less are eligible for the full amount. The stimulus phases out completely for couples earning $160,000. Head of Household filers can earn $112,500 for the full amount and it will completely phase out at $120,000.
The payments will be based on 2020 tax returns. If you haven’t filed for 2020 when the checks are distributed, the IRS will look at your 2019 return instead. For non-filers, the IRS will use your payment information from other programs.
Read this article for details about the third stimulus checks, who qualifies, and when they will be arriving.
The Child Tax Credit increased and will be paid in advance
The new Child Tax Credit amounts will be $3,000 for children ages 6 to 17, and $3,600 for children under age 6. The credit is fully refundable, and the age limit was raised, so 17-year-olds are now eligible for the credit.
The credit amount will start to phase out for single filers earning $75,000 or more, couples who earn $150,000 or more, and heads of household earning $112,500 or more.*
Typically, you would need to file a tax return, claim the credit, and then wait for your tax refund to arrive. But if you are eligible for the new Child Tax Credit, you won’t need to wait until next year to receive your credit. The Child Tax Credit you are entitled for 2021 will be delivered during the year. The amount you’ll receive is based on the number of eligible dependents you claimed on your 2020 tax return.
The IRS is creating an online information portal, so taxpayers can update their dependent information. That portal is coming but is not available yet.
The IRS has not officially announced when they will start sending Child Tax Credit payments, but early predictions say the checks could begin arriving in July, 2021. More details will follow as this information becomes available.
*If your income is higher than these limits, the regular $2,000-per-child tax credit is still available. It phases out completely for single filers with an AGI above $200,000 or joint filers with an AGI above $400,000.
The Earned Income Tax Credit increased for single filers
Several changes have been made to the Earned Income Tax Credit for 2021. The credit amount has nearly doubled for filers who do not have children. The age requirement has been lowered, so now people who are 19 or older can claim the credit (or age 18 if you were in foster care). And the investment income threshold has been raised to $10,000.
If your income in 2019 was greater than in 2021, you can use your 2019 income to calculate the 2021 EITC.
The Child and Dependent Care Credit increased and is refundable
If you are paying for child or dependent care services, you may be eligible for a credit worth up to 50% of your childcare expenses (it was 35% in previous years). Taxpayers who meet the requirements can now get as much as $8,000 in tax credit for one child and $16,000 for two or more children. The credit will be refundable for tax year 2021 (the return you will file in 2022).
The tax credit for sick leave has been extended
Self-employed taxpayers who are ill or caring for a family member and are unable to work due to COVID-19 can receive a tax credit to cover lost wages. This benefit is extended through October 1.