Author: Leon Clinton

For the 2021 tax year only, the American Rescue Plan Act of 2021 (ARPA) makes big, taxpayer-friendly changes to the federal income tax child tax credit (CTC). 

Here’s what you need to know, starting with some necessary background information.

CTC Basics

For 2018-2020 and 2022-2025, the maximum annual CTC is $2,000 per qualifying child. 

A qualifying child is an under-age-17 child who could be claimed as your dependent for the year. Basically, that means the child lived with you for over half the year; did not provide more than half of his or her own support; and is a U.S. citizen, U.S. national, or U.S. resident.

The maximum $2,000 CTC is phased out (reduced) if your modified adjusted gross income (MAGI) for the year exceeds $200,000, or $400,000 for a married joint-filing couple. The credit is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phaseout threshold.

For 2018-2020 and 2022-2025, the CTC is partially refundable. 

You can collect the refundable amount even if you have no federal income tax liability for the year. So, the refundable amount is free money. 

The refundable amount generally equals 15 percent of your earned income above $2,500. 

An alternative formula for determining the refundable amount applies if you have three or more qualifying children. In any case, the maximum refundable amount for 2018-2020 and 2022-2025 is limited to $1,400 per qualifying child. 

(If you have a 2020 tax liability, the CTC can offset up to $2,000.)

More Generous CTC Rules for 2021

For your 2021 tax year only, ARPA makes the following taxpayer-friendly changes. 

Qualifying Children Can Be Up to 17 Years Old 

The definition of a qualifying child is broadened to include children who are age 17 or younger as of December 31, 2021.

Bigger Maximum CTC with Separate Phaseout Rule for the Increase

ARPA increased the maximum CTC to $3,000 per qualifying child, or $3,600 for a qualifying child who is age 5 or younger as of December 31, 2021. But the increased 2021 credit amounts are subject to two phaseout rules: 

1. The increased CTC amount—$1,000 or $1,600, whichever applies—is phased out for single taxpayers with MAGI above $75,000, for heads of household with MAGI above $112,500, and for married joint-filing couples with MAGI above $150,000. The increased amount is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phaseout threshold.
2. The “regular” $2,000 CTC amount is subject to the “regular” phaseout rule explained earlier. 

Key point. If you’re not eligible for the increased CTC amount for 2021 because your income is too high, you can still claim the regular CTC of up to $2,000, subject to the regular phaseout rule.

CTC Is Fully Refundable for Most Folks

For the 2021 tax year, the CTC is fully refundable if you (or, if married, you and your joint-filing spouse) have a principal residence in the U.S. for more than half the year. If you are a member of the U.S. Armed Forces who is stationed outside the U.S. while serving on extended active duty, you’re treated as having a principal residence in the U.S.

For 2021, the CTC is fully refundable even if you have no earned income for the year. 

The MAGI phaseout rules explained earlier apply in calculating your allowable, fully refundable CTC for 2021.

IRS Will Make Advance CTC Payments (We Hope)

Another ARPA provision directs the IRS to establish a program to make monthly advance payments of CTCs (generally via direct deposits). 

Such advance payments will equal 50 percent of the IRS’s estimate of your allowable CTC for 2021. The advance payments will be made in the form of equal monthly installments from July through December 2021. To estimate your advance CTC payments, the IRS will look at the information shown on your 2020 Form 1040 (or on your 2019 return if you have not yet filed your 2020 return). 

If you would like to discuss the CTC with me, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 24, 2021

With the passage of the American Rescue Plan Act of 2021 (ARPA), Congress has temporarily abolished the health insurance premium tax credit “subsidy cliff.” 

For 2020 and 2021, self-employed and small-business owners and other individuals who must purchase individual health insurance may qualify for premium tax credit health insurance subsidies even if their income far exceeds the old limit of 400 percent of the federal poverty level (FPL).

To take advantage of the government subsidy, go to the health insurance marketplace (federal marketplace or state exchange) before August 15, 2021. The government expanded the open enrollment period. You can’t be turned down.

For 2020 and 2021, Americans who earn over 400 percent of the FPL are required to pay no more than 8.5 percent of their modified adjusted gross income (MAGI) for their premium tax credit (PTC) health insurance. Regardless of how high their income is, they are entitled to a PTC to the extent the cost of the silver benchmark plan exceeds 8.5 percent of MAGI.

Let’s take a look at Al and Alice. They are a self-employed, married couple who live in Seattle. Both are 62 years old. The annual cost for them of the benchmark silver plan in their area is $21,000. Their MAGI is $150,000. 

For 2021 and 2022, they are required to pay no more than $12,750 for PTC health insurance (8.5 percent x $150,000 = $12,750). Thus, they are entitled to a PTC of $8,500 ($21,000 – $12,500 = $8,500). 

If their MAGI was $200,000, they would have to pay $17,000 for PTC coverage and would still be entitled to a $4,000 tax credit ($21,000 – $17,000 = $4,000).

If you are looking for a possible reduction in your health insurance cost, I suggest checking out www.healthcare.gov. The government will direct you to the proper place (federal marketplace or state exchange).

• By Leon Clinton
• April 21, 2021

With the Consolidated Appropriations Act, 2021, millions of small-business owners like you now qualify for the employee retention credit (ERC), thanks to three big changes:

1. You can now obtain the ERC and the Paycheck Protection Program loan, but not on the same wages.
2. This new rule applies retroactively to 2020.
3. The new law adds an enhanced ERC for 2021.

And thanks to the latest new law, the American Rescue Plan Act of 2021 (ARPA), the already enhanced 2021 ERC is extended for an additional six months, through December 31, 2021.

The ERC is a big deal. It can put tens of thousands of dollars directly in your pocket to help offset your cost of paying employees during the COVID-19 pandemic.

Say during the first quarter of this year (2021) your S corporation paid the following wage and health expenses.

For the first quarter of 2021, the credit rate is 70 percent on up to $10,000 of W-2 wages per employee.

Your ERC for the first quarter of 2021 is $28,000, or 70 percent of $40,000. That’s a hefty chunk of change.

If you would like my help with your ERC, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 17, 2021