If any of your clients are welcoming a new baby, they’ll also get to receive a few extra tax benefits – even more than usual, thanks to some of the tax law changes included in the American Rescue Plan Act (ARPA). Here are six tax benefits new parents could qualify for in 2021.
The Child Tax Credit
The Child Tax Credit (CTC) is the most well-known tax benefit of having a new baby. The CTC has undergone several significant changes this year due to the ARPA. (Note: many of these changes are temporary and set to expire at the end of 2021. But your clients will continue to benefit from the regular CTC even once these expansions expire.)
Typically, the CTC includes a $2,000 tax credit per child, only $1,400 of which was refundable. However, under the new CTC, families below the income threshold receive a fully refundable $3,000 credit per child ages 6-17 and $3,600 per child ages 0-5. And yes, even if your client’s baby is born or adopted later in the year, they’ll still qualify for the full $3,600.
Be sure to let new parents know that claiming the CTC may mean receiving their refunds later than usual because of the PATH Act.
How do the monthly CTC payments work for a baby born in 2021?
Another significant change to the CTC this year is the monthly advance payments starting in July. Families who qualify for the full CTC will receive $250/month for children ages 6-17 and $300/month for ages 0-5. The only problem for families with a new baby? The IRS uses last year’s tax return (i.e., before the new baby was born) to determine who receives this credit. Fortunately, they’ll provide an easy solution through the new Child Tax Credit Update Portal. This portal should be available by July 1 and will allow families to update their income and dependent information so they can receive the correct monthly payments.
If your clients choose not to update their information in the portal, they’ll still be able to claim the full CTC when they file their 2021 taxes.
The Child and Dependent Care Credit
Like the CTC, the ARPA also expanded the Child and Dependent Care Credit this year. New parents can now receive a refundable tax credit for 50% of the amount they paid for qualifying child care expenses (up from 35%). Families can claim a credit of up to $8,000 per child and $16,000 total.
The Earned Income Tax Credit
Not every new parent will qualify for the Earned Income Tax Credit (EITC), but claiming a dependent child raises the income threshold for the EITC, making it far easier to qualify. The maximum adjusted gross income for those claiming zero dependents is $15,980 for single filers and $21,920 for joint filers. The maximum AGI for those claiming one dependent is $42,158 for single filers and $48,108 for joint filers.
Adoption Credit & Exclusion
Adopting a child could mean your client qualifies for up to $14,300 in Adoption Credit per child. This credit is non-refundable, but any amount that isn’t used to offset taxes this year can be carried forward to offset tax liability in the following years. Additionally, if your client’s employer helped pay for any of their adoption expenses, this amount can be excluded from their taxable income.
Dependent Care Flex Spending Accounts
Paying for child care for a new little one can be expensive. Fortunately, your clients can save on child care costs with a Dependent Care Flex Spending Account. These FSAs allow employees to deposit money into the account directly from their paycheck before taxes are taken out, meaning they’ll end up paying less in taxes overall. In most cases, your clients will need to enroll in a Dependent Care FSA through their employer.
Filing as Head of Household
Unmarried parents can get a tax break by filing as Head of Household instead of filing as Single. To qualify, they’ll need to be considered unmarried for tax year 2021, pay for more than 50% of their household expenses, and their qualifying dependent (in this case, their new baby) must live with them for more than 50% of the year. If they aren’t sure if they qualify, the IRS’s “What’s My Filing Status?” tool can help.
For more information on helping your clients navigate common life changes, check out our post on How Your Client’s Life Changes Impact Their Taxes.
The information in this article is up to date for tax year 2020 (taxes filed in 2021).