The United States Congress officially passed the “American Rescue Plan” in March of 2021. This purpose of this $1.9 trillion package is to help families and speed up the country’s recovery from the COVID-19 pandemic. Among other things, the new law made changes to the existing Child Tax Credit, Childcare Tax Credit, and the Earned Income Tax Credit. It is important to note that these changes are only guaranteed for 2021, although some lawmakers are pushing for more permanent changes.

Child Tax Credit. In 2020, the Child Tax Credit was worth $2,000 per child. Under the American Rescue Plan of 2021, the Child Tax Credit is $3,000 per child or $3,600 for children under the age of 6. Additionally, the IRS will pay half of the total credit amount in advance with monthly payments beginning to families on July 15, 2021. Parents will receive the other half of the tax credit upon filing their 2021 taxes. The tax credit is fully refundable for 2021, meaning that it helps people with no tax liability obtain payment from the credit. However, the 2021-specific benefits begin phasing out if the party’s income is $75,000 (single), $112,500 (head of household), and $150,000 (filing jointly). This means that people earning more than these amounts will receive less of a credit. For reference, the 2020 benefit of $2,000 started phasing out at $200,000 (single or head of household) and $400,000 (jointly). While the credit is worth more, it is available to fewer people.

Child Care Credit. The Child Care Tax Credit helps families who incur childcare costs and reimburses them for a percentage of their expenses up to a maximum amount. In previous years, families received a credit equivalent to anywhere from 20-35% of the cost of childcare up to a maximum of $3,000 for 1 child and $6,000 for 2 or more children. For 2021, the percentage and the maximum amount of allowable expenses has increased dramatically. The maximum percentage increased to 50% and the expense maximum increased to $8,000 for 1 child and $16,000 for 2 or more children. For 2021, the credit was made refundable and rules changed for the phase out of this benefit. In sum, the credit has been restructured to benefit lower-income taxpayers and give less of a benefit to very high-income taxpayers.

Earned Income Tax Credit. The Earned Income Tax Credit (“EITC”) helps families who are lower income and the amount of the credit may increase with qualifying children. Please see this blog post for details about the EITC in spousal support cases. The EITC was designed to be fully refundable. The amount of the credit increases with income up to a certain point, and then it decreases the more income a person has. For 2021, that changing point if you have one qualifying child is $19,500 (peak credit is worth $3,618 for one child). Previously there were age limits on the credit (25-65) and you couldn’t claim the credit if you filed your taxes “married, filing separately.” Under the American Tax Rescue Plan, there is no upper age limit and you can claim the credit as young as 19, as long as you aren’t a student. You can use your 2019 income instead of 2021 if it yields a better result. Additionally, you can claim the credit as married filing separately if you have separated before July 1 or have a signed Separation Agreement by December 31. The relaxation of these previous restrictions will allow more people to benefit from and claim the Earned Income Tax Credit in 2021.

Tax planning can increase the benefits available to a divorced or separating family. If you are going through a divorce, you should strategize with your tax expert and attorney and consider all of these 2021-specific benefits to see how it impacts your case. Additionally, parents who already have agreements or orders in place should consider whether they are entitled to some or all of the benefits under the American Rescue Plan and whether they are obligated to share those benefits with the other parent.