Families might be able to cash in on many tax credits to offset their tax liability. Additionally, recent legislation has improved some of the credits for 2021. Here is an overview of four tax credits for families that are currently in the books.

  1. Child Credit

Through 2025, eligible parents could possibly claim a child credit of upwards of $2,000 for each qualifying child under the age of 17, of which $1,400 would be refundable. (This means you could collect the refundable amount even if you have no federal income tax liability for the year.) However, the credit is subject to a phase-out, based on your modified adjusted gross income (MAGI).

For 2021, the American Rescue Plan Act (ARPA) expands the child credit. These changes include the following:

  • The maximum credit increases to $3,000 for any qualifying child. Additionally, you can claim another $600 for each qualifying child under the age of six.
  • The credit is 100% refundable.
  • The age threshold for any qualifying child increases from 17 to 18.

Fortunately, you don’t have to wait until you file your 2021 tax return to benefit from this enhanced child credit. The IRS will start distributing advance payments to eligible parents on July 15 and continue them through December of this year.

There is one major downside to the changes: The phase-out ranges for the child credit in 2021 are lower than previously. However, some parents with higher incomes above the phase-out range for 2021 can elect to claim a child credit of up to $2,000 under the prior rules.

  1. Child and Dependent Care Credit

The ARPA also includes big changes in the dependent and child care credit for 2021. Usually, the changes are favorable to taxpayers.

For starters, the dependent care credit may be claimed by parents who incur costs while caring for children under the age of 13 (and other eligible dependents) that allow them to be employed. This covers expenses for daycare centers, summer day camp, and babysitters.

In years prior, the credit was nonrefundable. The maximum credit percentage was 35% (20% for parents with an AGI above $43,000). It was available for the first $3,000 of qualified expenses for one child ($6,000 for two or more children). The maximum credit is usually $600 for one child ($1,200 for two or more children).

Under the ARPA, the dependent care credit is completely refundable for 2021. Also, the maximum credit rate increases to 50% for qualified expenses of up to $8,000 for one child ($16,000 for two or more children). The credit is ultimately worth up to $4,000 for one child ($8,000 for two or more children).

However, the credit percentage is reduced gradually if your AGI exceeds $125,000. It bottoms out at 20% for an AGI above $183,000. Additionally, if your AGI exceeds $400,000, the credit is reduced gradually until it zeroes out for an AGI above $438,000.

  1. Higher Education Credits

Parents with children in college may be entitled to get one of the following higher education credits:

American Opportunity Tax Credit (AOTC). This credit is available for qualified expenses for each student in the family for upwards of four years. Qualified expenses include tuition, books, room and board, supplies, and computer equipment. The AOTC is phased out between $80,000 and $90,000 of MAGI for single households ($160,000 and $180,000 for married people who file jointly).

Lifetime Learning Credit (LLC). The maximum LLC is $2,000 per taxpayer, but it is available for all years of the study. Originally, the phase-out ranges were between $59,000 and $69,000 of MAGI for a single household ($118,000 and $138,000 for married household who file jointly). Under the Consolidated Appropriations Act, the lower phase-out ranges for the LLC have been increased to match the AOTC.

You can claim either the AOTC or the LLC, but not both. For most parents, the AOTC remains the optimal choice for a child completing school in four years.

  1. Adoption Credit

If you’ve adopted a child in 2021, or plan to adopt one, you may qualify for a child tax credit. For 2021, the maximum credit is $14,440 of the qualified expenses incurred to adopt an eligible child who is under the age of 18 or one who needs special care. Qualified expenses include adoption agency fees, attorneys’ fees, court costs, travel costs (including meals and lodging) and re-adoption expenses for your foreign child.

Hoberman & Lesser’s NYC accountants serve a broad cross section of businesses, ranging from publicly held companies, to private sector businesses, to individual entrepreneurs throughout New York, New Jersey, and Connecticut, and across the United States. To schedule a complimentary and confidential consultation with a member of our team, please contact us.