IRS Releases New American Rescue Plan FAQs for Families and Small Businesses
The IRS recently released two new sets of FAQs to assist families and small and mid-sized employers in claiming credits under the American Rescue Plan (ARP). The child and dependent care credit as well as the paid sick and family leave credit were enhanced under the ARP, enacted in March to assist families and small businesses with COVID-19 pandemic recovery. The FAQs provide information on eligibility, computing the credit amounts and how to claim the benefits.
The ARP increased the maximum amount of work-related expenses for qualifying care that may be considered in calculating the child and dependent care credit, increased the maximum percentage of those expenses for which the credit may be taken, modified how the credit is reduced for higher earners and made it refundable.
Eligible taxpayers can claim qualifying work-related expenses up to $8,000 for one qualifying person (up from $3,000 in prior years) or $16,000 for two or more qualifying persons (up from $6,000 in prior years). The amount of qualifying work-related expenses claimed cannot exceed the taxpayer’s earnings.
Combined with the increase to 50 percent in the maximum credit rate, taxpayers with the maximum amount of qualifying work-related expenses would receive a credit of $4,000 for one qualifying person or $8,000 for two or more qualifying persons. When calculating the credit, a taxpayer must subtract employer-provided dependent care benefits from total work-related expenses.
More taxpayers than in prior years will qualify for the new maximum 50 percent credit rate, as the ARP increased to $125,000 the adjusted gross income level at which the credit rate starts to be reduced. Above $125,000, the 50 percent credit percentage goes down as income rises. Taxpayers with adjusted gross income over $438,000 are not eligible for the credit.
For the first time, the credit is fully refundable, which means an eligible taxpayer can receive it even if they owe no federal income tax. To be eligible, a taxpayer (or the taxpayer’s spouse if filing a joint return) must reside in the United States for more than half of the year. Special rules apply to military personnel stationed outside of the United States.
To claim the credit for 2021, taxpayers will need to complete Form 2441, Child and Dependent Care Expenses, and include the form when filing their tax returns in 2022.
The paid sick and family leave tax credits under the ARP are similar to those put in place by the Families First Coronavirus Response Act (FFCRA), as extended and amended by the COVID-related Tax Relief Act of 2020. The ARP amends and extends these credits and provides that leave wages paid to an employee who is seeking or awaiting the results of a test for, or diagnosis of, COVID-19, or is obtaining immunizations related to COVID-19 or recovering from immunization, are wages that can be eligible for the credits. Eligible employers may now claim the credit for paid family leave wages for all the same reasons they can claim the credit for paid sick leave wages.
The FAQs include information on how eligible employers may claim the paid sick and family leave credits, including how to file for and compute the credits, and how to receive advance payments for and refunds of the credits. Under the ARP, eligible employers may claim tax credits for qualified leave wages and certain other wage-related expenses paid with respect to leave taken by employees beginning on April 1, 2021, through Sept. 30, 2021.
The ARP keeps the daily wage thresholds that previously existed for these credits under the FFCRA. The aggregate cap on qualified sick leave wages remains at up to a maximum of 80 hours. The aggregate cap on qualified family leave wages increases to $12,000 from $10,000. These caps reset with respect to leave taken by employees beginning on April 1, 2021.
The paid leave credits under the ARP are refundable tax credits against the employer's share of Medicare tax. In anticipation of the credits to be claimed on the applicable federal employment tax return, eligible employers can keep the federal employment taxes they otherwise would have deposited up to the amount of the credit for which they are eligible. If the eligible employer does not have enough federal employment taxes on deposit to cover the amount of the anticipated credits, they may request an advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Self-employed individuals may claim comparable credits on the Form 1040, U.S. Individual Income Tax Return.