How the US bailout affects 2021 taxes, part 1
This is the first of two tax tips providing insight into how the US bailout may affect the 2021 taxes of some individuals.
Increase in credit for child and dependent care for 2021 only
The new law increases the amount of the credit and the percentage of employment-related expenses for eligible care taken into account in the calculation of the credit, changes the phase-out of the credit for high incomes and makes it refundable for eligible taxpayers .
For 2021, eligible taxpayers can deduct eligible employment-related expenses up to:
- $ 8,000 for an eligible person, compared to $ 3,000 in previous years, or
- $ 16,000 for two or more eligible people, compared to $ 6,000.
The maximum credit in 2021 has increased to 50% of the taxpayer’s employment-related expenses, which equates to $ 4,000 for one qualifying individual, or $ 8,000 for two or more qualifying individuals. When calculating the credit, a taxpayer must subtract employer-provided dependent benefits, such as those provided through a flexible expense account, from total employment-related expenses.
An eligible individual is a dependent under the age of 13, or a dependent of any age or a spouse who is unable to care for themselves and who lives with the taxpayer for more than half of the year. .
As before, the more a taxpayer earns, the lower the percentage of employment-related expenses taken into account in the credit calculation. However, under the new law, more people will be eligible for the new maximum percentage rate of the employment expense credit of 50%. This is because the level of adjusted gross income at which the credit percentage begins to wane is raised to $ 125,000. Above $ 125,000, the 50% credit percentage decreases as income increases. It is entirely unavailable to any taxpayer whose adjusted gross income is greater than $ 438,000.
The credit is fully refundable for the first time in 2021. This means that an eligible taxpayer can receive it, even if they owe no federal income tax. To be eligible for the refundable portion of the credit, a taxpayer, or his or her spouse if filing a joint return, must reside in the United States for at least half of the year.
Workers can save more in a Dependent FSA
For 2021, the maximum amount of employer-provided non-taxable dependent benefits has been increased to $ 10,500. This means that an employee can set aside $ 10,500 in a flexible dependent expense account, instead of the normal $ 5,000.
Workers can only do this if their employer adopts this change. Employees should contact their employer for more details.
EITC without child extended for 2021
For 2021 alone, more eligible childless workers may qualify for the Working Income Tax Credit, a fully refundable tax benefit that helps many low- and modest-income workers and working families. This is because the maximum credit is almost tripled for these taxpayers and is, for the first time, available for young workers and no longer has an age limit.
For 2021, the EITC is generally available for taxfilers without eligible children who are at least 19 years of age and whose income is less than $ 21,430; $ 27,380 for spouses filing a joint return. The maximum EITC for filers without eligible children is $ 1,502.
Another change for 2021, allows individuals to calculate the EITC using their 2019 activity income if they were greater than their 2021 activity income. In some cases, this option will give them more credit.
COVID Tax Advice 2021-79