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.
1. More generous child and dependent care tax credit
“This is a biggie. It was significantly expanded,” said Kathy Pickering, Chief Tax Officer, The Tax Institute at H&R Block.
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).
2. A temporary expansion of the child tax credit
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.
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.
3. Claim a recovery rebate credit
Since the pandemic began, the IRS has sent out three rounds of Economic Impact Payments to eligible Americans, the last of which went out in 2021.
“Individuals who didn’t qualify for a third Economic Impact Payment or got less than the full amount, may be eligible to claim the 2021 recovery rebate credit based on their 2021 tax year information,” the IRS noted.
If you got a stimulus payment but your 2021 income would have disqualified you, there’s good news. “You do not need to repay the third stimulus payment — which was based on your 2019 or 2020 income — if your 2021 income would have disqualified you from all or part of the payment,” said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.
4. Expansion of the Earned Income Tax Credit
The American Rescue Plan nearly tripled the maximum credit available to $1,502.
The credit is also available for the first time to childless workers as young as 19 and workers 65 and older.
For people who do have qualifying children, if they earn $57,414 or less, they may qualify for the EITC. And depending how many kids they have, they could get a maximum credit of $6,728.
5. Special charitable tax deduction
Normally, only tax filers who itemize deductions can deduct their charitable contributions. But the IRS once again is allowing those who take the standard deduction — which is the majority of tax filers — to deduct up to $300 in cash to qualifying charities. And this year, married couples filing jointly may deduct up to $600.