Many U.S. tax filers get refunds when they file their federal income taxes. But this year, thanks to several temporarily expanded tax breaks, you could get back more — or in some cases, less — than you might expect.
This is particularly the case if you were eligible to receive any of the tax relief measures included in the American Rescue Plan, which was signed into law last March.
In many instances, the tax breaks will also benefit low-income earners who ordinarily do not have to file a return.
Here are several key breaks you should keep in mind as you gather documents to prepare your 1040.
1. More generous child and dependent care tax credit
If you were working or going to school and paying for the care of a child under 13 or another family member who is not mentally or physically able to care for themselves, you likely will benefit from the temporary increases made to the child and dependent care credit.
"This is a biggie. It was significantly expanded," said Kathy Pickering, Chief Tax Officer, The Tax Institute at H&R Block.
The credit is based on your income and calculated as a percentage of the qualifying expenses you incurred — which this year is 50%, up from 35% in the years prior, although that percentage is reduced for those making more than $125,000.
Qualifying expenses are minus any employer-provided dependent care benefits (e.g., money you put into a tax-advantaged flexible spending account).
All in, the credit this year could reduce your tax bill — or increase your refund — by up to $4,000 for one dependent or $8,000 for two or more. Prior to 2021, the credit would only have done so by $1,050 or $2,100, respectively.
2. A temporary expansion of the child tax credit
The maximum value of the child tax credit is temporarily $3,000 per child ages 6 through 17 and $3,600 per child ages 5 and under.
Unlike in prior years, the credit is fully refundable for 2021, meaning you can get the maximum amount of the credit even if it exceeds your federal income tax liability for the year.
Except for the wealthiest households, "anyone with children ages 17 and below is likely eligible to claim the child tax credit," Pickering said.
And for the first time, the IRS made advanced monthly payments on that credit, from July through December. So you may already have received about half of your credit and can claim the other half on your return. To help with that calculation, the IRS will send you a letter (Letter 6419) detailing the amount you've already received, which you should use to reconcile how much more you are due. The amount may be different than you expect.
Here's why: The advanced payments were calculated based on your 2020 or 2019 income and family situation. But the final calculation will be based on your 2021 information, which may change how much you're eligible for.
For instance, if you had another child in 2021 you may be entitled to more than your advanced payments reflect.
Or you may have gotten paid too much if, for example, you're divorced and changed which parent could claim a child on their tax return. The same might be true if you made more money in 2021 or one of your children turned 18. Whether you have to "repay" the excess you got — which most likely means you just claim less of a credit for the first half of last year — depends on your income.
Those making less than $40,000 ($60,000 if married) get full repayment protection. But if you're making more than $80,000 (or $120,000 if married) you may have to repay. (Here is the IRS's FAQ on the issue.)
3. Claim a recovery rebate credit
Since the pandemic began, the IRS has sent out three rounds of Economic Impact Payments to eligible Americans, the last of which went out in 2021.
If you got that third payment, the IRS will send you a letter (Letter 6475) detailing how much you were paid. You should report that information on your return.
But if you didn't get the third payment — or perhaps now qualify for more than you were paid because your income or family situation changed — you should review whether to claim the refundable recovery rebate credit.
"Individuals who didn't qualify for a third Economic Impact Payment or got less than the full amount, may be eligible to claim the 2021 recovery rebate credit based on their 2021 tax year information," the IRS noted.
If you got a stimulus payment but your 2021 income would have disqualified you, there's good news. "You do not need to repay the third stimulus payment — which was based on your 2019 or 2020 income — if your 2021 income would have disqualified you from all or part of the payment," said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.
4. Expansion of the Earned Income Tax Credit
The American Rescue Plan nearly tripled the maximum credit available to $1,502.
To qualify, your earned income for 2021 must be below $21,430 ($27,380 if married filing jointly). And on a permanent basis for all EITC recipients, the amount of investment income you may have on top of your wages and still claim the credit increased to $10,000.
The credit is also available for the first time to childless workers as young as 19 and workers 65 and older.
For people who do have qualifying children, if they earn $57,414 or less, they may qualify for the EITC. And depending how many kids they have, they could get a maximum credit of $6,728.
5. Special charitable tax deduction
Normally, only tax filers who itemize deductions can deduct their charitable contributions. But the IRS once again is allowing those who take the standard deduction — which is the majority of tax filers — to deduct up to $300 in cash to qualifying charities. And this year, married couples filing jointly may deduct up to $600.