American Rescue Plan Act of 2021 – Part 4

Crosslin is pleased to present a six-part series on the American Rescue Plan Act of 2021, covering topics such as stimulus payments, child tax credit, employee retention credit, enhanced earned income tax credit, child and dependent care tax credit, and paid medical and family leave credit. Check back with us throughout the next two weeks to read more about these current hot topics. As always, contact the Crosslin tax team with any questions. Today’s summary discusses the earned income credit.

Included in a number of tax provisions intended to stimulate the economy and speed recovery from the COVID-19 pandemic, the American Rescue Plan Act of 2021 provides several enhancements to the earned income tax credit.

In general, the earned income tax credit (EITC) is designed to benefit lower-income individuals with earned income. The amount of the credit depends on the taxpayer’s taxable earned income and number of qualifying children. The EITC may be at least partially refundable. The credit phases out once earned income exceeds a threshold amount based on filing status. Taxpayers must file income tax returns to claim the EITC.

Under the American Rescue Plan, for 2021 only, the amount of the credit is significantly increased for filers without children. The American Rescue Plan increases the childless EITC amount for 2021 from $543 to $1,502, increases the amount of income at which the credit is maximized to $9,820 (currently set at $7,100) and increases the threshold for the phaseout of the credit for non-joint filers to $11,610 (currently set at $8,880).

The minimum age for childless claimants of the EITC is also reduced from 25 to 19 (age 24 in the case of full-time students) with special rules for foster and homeless youth. There is no maximum age for claiming the EITC in 2021.

The American Rescue Plan also allows taxpayers to substitute 2019 earned income for 2021 earned income in claiming the EITC on 2021 returns if 2021 earned income was less than 2019 earned income. This is similar to a provision included in the Consolidated Appropriations Act, 2021, applicable to 2020 claims of the EITC.

Permanent Changes

Other changes to the EITC are made permanent after December 31, 2020. This includes the elimination of the prohibition against filers claiming the childless EITC solely because they are unable to claim the EITC for filers with children due to the lack of identification requirements. Additionally, a married but separated individual can claim the EITC as an unmarried person if certain requirements relating to children are satisfied. Finally, the amount of disqualifying investment income for purposes of the EITC is increased to $10,000, adjusted for inflation after 2021. The current amount of disqualifying investment income is $3,650 for 2021.

If you have any questions related to the EITC or other provisions under the American Rescue Plan, please contact the Crosslin tax team at (615) 320-5500. We are here to help!