What You Need To Know About Two Tax Credit Provisions in the American Rescue Plan
Angela Lawrence, Quality Control Coordinator at Klatzkin, contributed to this post.
When Congress passed the American Rescue Plan Act (ARPA) in March 2021, it included expansions of the existing child and dependent care credit and the paid sick and family leave credit. The IRS recently released some guidance on the expanded tax credits here and here. Keep reading for a brief overview of what taxpayers and employers need to know about the expanded tax credits, why they’re important, and how they could affect you.
Child and Dependent Care Credit
The child and dependent care tax credit was expanded under ARPA to help families deal with the fallout from the COVID-19 pandemic. For 2021, the maximum amount of work-related expenses for qualifying care that can be used to calculate the credit have been increased, up to $8,000 for one qualifying person or up to $16,000 for two or more qualifying persons (increased from $3,000 and $6,000, respectively). With the maximum credit rate increased to 50%, this means the credit has increased to $4,000 and $8,000, respectively. Work-related expenses are defined as amounts you pay for care for a qualifying person, such as payments made to a daycare, so that you can work or look for work. A qualifying person is defined as a dependent under 13, or a dependent or spouse of any age who is incapable of caring for themselves and lives with the taxpayer for more than six months of the year.
More taxpayers will qualify for the maximum credit this year, as ARPA increased the adjusted gross income level at which the credit rate begins to be reduced to $125,000. It phases out entirely for taxpayers with an AGI over $438,000.
For the first time, the credit is refundable, meaning an eligible taxpayer can receive the credit even if they don’t owe any federal taxes. However, the taxpayer must have earned income during the year, and the number of qualifying expenses claimed cannot exceed the taxpayer’s earnings. The credit will be calculated on a form included with your tax return filed in 2022.
Paid Sick and Family Leave Credit
The paid sick and family leave credit was expanded under ARPA to help small businesses get reimbursed for expenses paid relating to providing their employees with paid sick and family leave for reasons associated with COVID-19. ARPA builds upon previous acts to include wages paid to employees who are unable to work because they are awaiting test results for COVID-19, have symptoms and are awaiting a diagnosis, and are receiving or recovering from vaccination, or an employee who has to care for someone who is quarantining or whose place of care is closed due to COVID-19. Credits can be claimed for family leave wages for the same reasons as paid sick leave wages.
Eligible employers include businesses and tax-exempt organizations with less than 500 employees and some governmental employers. The tax credits can be claimed for qualified wages and certain expenses paid for leave taken by employees from April 1, 2021, to September 30, 2021. Sick leave is capped at two weeks (up to 80 hours), and family leave wages are capped at $12,000 (up from $10,000). The credits are tax credits against the employer’s portion of Medicare tax and are refundable. Similar credits are available for self-employed individuals.
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©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.