The American Rescue Plan Act of 2021 (P.L. 117-2; H.R. 1319; 3/11/21) provides a variety of financial and other relief for COVID-19 problems. Most of the changes are only for 2021.  At least two are for 2020 and mean that the IRS has to update forms and computer systems and get information out to taxpayers quickly including what to do if you already filed your return.  These two changes for 2020:

1. $10,200 of unemployment compensation receivd in 2020 is non-taxable if the taxpayer’s AGI is under $150,000 (if MFJ and both spouses received such comp, each get to exclude up to $10,200). [IRS guidance of 3/12/21]
2. Not having to repay an advance Premium Tax Credit if the individual’s income turns out to be over 400% of the federal poverty line.

Some of the 2021 changes are not solely tied to the pandemic as these changes help low-income families by making the tax system more equitable and have been proposed by President Biden and others. One of these changes is making the $2,000/child tax credit fully refundable and increasing the credit.

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You are eligible for the Child Tax Credit if you have a qualifying child/children and you have earned income, according to the IRS requirements, which are:

1. Your child is aged 16 years or younger, as of December 31 of the tax year.
2. Your child is a U.S. citizen, U.S. National or U.S. Resident Alien and has a social security number. There is an exception for an adopted child.
3. You have $2,500 of earned income as an employee or from self-employment. This is down from $3,000 prior to the new Tax Cuts and Jobs Act (TCJA).
4. The amount of the credit is tied to the amount of your earned income.
5. The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies, depending on your filing status.
6. For individual filers, the phase-out begins at $200,000 ($400,000 for joint filers).

Starting with tax year 2018, the Child Tax Credit will allow you to reduce your federal income tax by up to $2,000 for each qualifying child.

$1,400 of which is a refundable credit, expats who managed to bring their tax owing down to zero by using the foreign tax credit would therefore receive a refund of $1,400. This amount will be adjusted for inflation after 2018.

Your child must be your son, daughter, stepchild, foster child, sibling, stepsister/brother or a descendant of any of these individuals. A legally adopted child is treated as your own child. The child must not have provided more than half of their own support and you need to claim them as a dependent on your federal tax return. The qualifying child should have lived with you for more than half of the tax year, and there are some exceptions to the residence test.

Have a tax question? Contact Olivier Wagner.