Many US tax filers get refunds when they file their federal income taxes. But this year, thanks to several temporarily expanded tax breaks, you could get back more — or in some cases, less — than you might expect.
This is particularly the case if you were eligible to receive any of the tax relief measures included in the American Rescue Plan, which was signed into law last March.
In many instances, the tax breaks will also benefit low-income earners who ordinarily do not have to file a return.
Here are several key breaks you should keep in mind as you gather documents to prepare your 1040.
More generous child and dependent care tax credit
If you were working or going to school and paying for the care of a child under 13 or another family member who is not mentally or physically able to care for themselves, you likely will benefit from the temporary increases made to the child and dependent care credit.
The credit is based on your income and calculated as a percentage of the qualifying expenses you incurred — which this year is 50%, up from 35% in the years prior, although that percentage is reduced for those making more than $125,000.
Qualifying expenses are minus any employer-provided dependent care benefits (e.g., money you put into a tax-advantaged flexible spending account).
All in, the credit this year could reduce your tax bill — or increase your refund — by up to $4,000 for one dependent or $8,000 for two or more. Prior to 2021, the credit would only have done so by $1,050 or $2,100, respectively.
2. A temporary expansion of the child tax credit
The maximum value of the child tax credit is temporarily $3,000 per child ages 6 through 17 and $3,600 per child ages 5 and under.
Unlike in prior years, the credit is fully refundable for 2021, meaning you can get the maximum amount of the credit even if it exceeds your federal income tax liability for the year.
Except for the wealthiest households, “anyone with children ages 17 and below is likely eligible to claim the child tax credit,” Pickering said.
And for the first time, the IRS made advanced monthly payments on that credit, from July through December. So you may already have received about half of your credit and can claim the other half on your return. To help with that calculation, the IRS will send you a letter (Letter 6419) detailing the amount you’ve already received, which you should use to reconcile how much more you are due. The amount may be different than you expect.
Here’s why: The advanced payments were calculated based on your 2020 or 2019 income and family situation. But the final calculation will be based on your 2021 information, which may change how much you’re eligible for.
For instance, if you had another child in 2021 you may be entitled to more than your advanced payments reflect.
Or you may have gotten paid too much if, for example, you’re divorced and changed which parent could claim a child on their tax return. The same might be true if you made more money in 2021 or one of your children turned 18. Whether you have to “repay” the excess you got — which most likely means you just claim less of a credit for the first half of last year — depends on your income.
