On March 11, 2021, President Biden signed the American Rescue Plan (ARP) into law. Among many provisions related to COVID-19, the bill includes several items that impact most families and caregivers. Here are the top five:
1. Doubling the expenses families can put toward a Dependent Care Account (FSA)
This is usually the biggest care-related tax break you can take advantage of because the amount of income that you allocate toward your Dependent Care Account becomes tax-free. So, it acts like a tax deduction. The ARP increases the cap on the amount you can allocate toward a Dependent Care Account from $5,000 to $10,500 for the 2021 tax year – more than doubling the savings from an average of $2,000 to around $4,000. As a bonus, the ARP allows you to roll over unused money in your Dependent Care Account into 2022.
2. Increase in savings from the Child and Dependent Care Tax Credit
The amount of childcare expenses families can receive a tax credit on increases to $8,000 per dependent (max of $16,000 per household). Previously the cap was $3,000 per dependent (max of $6,000 per household). This tax break will now phase out for families with AGI over $440,000.
3. Extension of paid sick leave and paid family leave credits
The Families First Act (FFCRA) provided subsidized paid sick leave or paid family leave for several reasons related to COVID-19. The American Rescue Plan Act extends the FFCRA tax credits, providing an additional 10 days of subsidized COVID-related paid leave (up to $12,000 total) per employee, extending the time period for using subsidized paid leave through the end of September 2021, and expanding the COVID-related reasons that qualify for the tax subsidy. While providing this paid leave is now optional, access to a dollar-for-dollar reimbursement makes it much easier for families to provide the leave if the need arises.
4. Larger Child Tax Credit
The child tax credit increases from $2,000 for eligible children (up to age 16) in 2020 to $3,600 for each child up to age 5 and $3,000 for those age 6 to 17. The full increase is available for households with adjusted gross income (AGI) of $150,000 or less for joint filers ($75,000 for individual filers). The regular credit of $2,000 per child is still available for families with AGI of up to $400,000 for joint filers ($200,000 for individual filers).
5. A third stimulus payment
The American Rescue Plan provides a direct payment of $1,400 for those with annual adjusted gross income (AGI) of $75,000 or less ($150,000 for couples), gradually decreasing the payment amount for those that earn between $75,000 and $80,000 ($150,000-$160,000 for couples). Additionally, families that qualify can receive $1,400 for every child or other dependent they have. The stimulus checks are cut based upon income reported on the taxpayer’s 2019 tax return (or 2020 return if it has already been filed). The IRS provides an online tool for taxpayers to check the status of their stimulus check and access answers to FAQs.
While all five of these items do not apply to all families, the vast majority qualify for at least one. We encourage you to contact our partners at HomePay for a complimentary budgeting assessment.