The Internal Revenue Service has released guidance for changes to the Child Tax Credit, Earned Income Credit, and application percentage table (APT) that were included in the American Rescue Plan Act of 2021 (ARPA).
The APT table is used to calculate a taxpayer’s premium tax credit (PTC) and the required contribution percentage that determines whether the taxpayer is eligible for minimum essential medical coverage for the 2021 tax year.
The changes are spelled out in Revenue Procedure 2021-23.
Overview of Changes
ARPA increases the refundable part of the Child Tax Credit for tax year 2021, allowing up to $3,600 for qualifying children younger than six and $3,000 for children ages six to 17.
To qualify for the higher amounts, the taxpayer—or the spouse of a taxpayer filing a joint return—had to have a main home in the U.S. for more than half of the taxable year or was a bona fide resident of Puerto Rico for the year.
There are provisions for partial refunds of this credit in the current Code, but the guidance says those won’t apply for TY 2021 and beyond.
The guidance also modifies existing rules that, for taxable years beginning in 2021, the Earned Income Credit (EIC) will include some special rules. These special rules will encompass eligible taxpayers with no qualifying children, but whose income exceeds the credit’s limit.
ARPA also modifies the Internal Revenue Code to bar taxpayers from receiving the EIC when their total amount of disqualified income is more than $10,000. After Dec. 31, the guidance says, that $10,000 cap will be adjusted for inflation.
The guidance document includes a table showing the various limits under the American Rescue Plan. For example, the complete phaseout amount—the amount of adjusted gross income or earned income, if greater—at which no credit is allowed.
For married couples filing jointly, that cutoff is $21,430 if they don’t have any qualifying children. If they have one qualifying child, their income limit is $42,158; if they have two qualifying children, they can make up to $47,915; and with three children, their income limit for the credit is $51,464.
Interest Rate Changes
ARPA modifies the applicable percentage table in the Code to provide temporary percentages.
The APT is used by taxpayers to figure how much of the Premium Tax Credit they can claim for the year.
One thing not changed by ARPA is the required contribution percentage used to determine if taxpayers and their families are eligible for employer-sponsored medical coverage for 2021: 9.83 percent.
Source: Rev. Proc. 2021-23