Taking Advantage of Tax Credits

    American Rescue Plan Act of 2021 – Enacted in March 2021 to assist families and small businesses with the fallout of the COVID-19 pandemic and recovery.  This act enhanced the existing Child Tax Credits and Child and Dependent Care Credit for 2021 and some of highlights include:

    Child Tax Credit Changes

    For 2021, the child tax credit was expanded from $2,000 per child to $3,000 ($3,600 for children under 6) and income limits to qualify for the expanded credit were lowered.  Families that do not qualify for the credit using the revised income limits are still eligible for the original $2,000 per-child credit.  Another change is that the entire credit is fully refundable for 2021 which means that eligible families can get it, even if they owe no federal income tax. 

    Child and Dependent Care Credit

    The Child and Dependent Care Credit is available for people who work to help cover the costs associated with caring for a child or a dependent with disabilities.  This credit was also expanded for 2021 with the amount of qualifying expenses increasing from $3,000 to $8,000. The percentage of qualifying expenses eligible for the credit also increased from 35% to 50% and the like the Child Tax Credit, became refundable.  You may be eligible for the credit if you paid a person (certain exclusions apply) or a daycare provider to care for a child that is 12 years old or younger who you claim as a dependent on your tax return if the care allowed you to work or to look for a job, and you (and your spouse, if married) earned income during the tax year.

    Higher Education Tax Credits

    If you, your spouse or a dependent are working towards postsecondary education, you may be eligible for a tax benefit.  Two credits that could be available are The American Opportunity Tax Credit and The Lifetime Learning Credit. 

    The American Opportunity Tax Credit (AOTC)

    The American Opportunity Tax Credit allows for a maximum benefit of up to $2,500 per eligible student but can only be used for the first four years at an eligible college or vocational school.  The student must be pursuing a degree or other recognized education credential and the credit is partially refundable up to $1,000.

    The Lifetime Learning Credit

    The Lifetime Learning Credit allows for a maximum benefit of $2,000 per tax return, per year, no matter how many students qualify.  The credit is available for all years of postsecondary education and for courses to acquire or improve job skills.  The credit is available for an unlimited number of tax years.

    Student Loan Interest Deduction

    The IRS allows parents to deduct interest payments on certain student loans.  To qualify, the student loan must come from a qualified lending institution and the student must be enrolled at least half-time in a degree program when the loans were originated.  You may deduct the lesser of $2,500 or the amount of interested you actually paid during the tax year.  The deduction is subject to phaseout limits based on your income.

    If you would like more information on these items, check out the following links and speak with a tax professional about your personal tax situation.