2021 Tax Breaks from the American Rescue Plan Act

On March 11, President Biden signed the American Rescue Plan Act of 2021 to provide additional relief for individuals and businesses affected by the coronavirus pandemic. Here are the major provisions of the bill that could mean more money in your pocket during the 2021 tax year.

Child Tax Credit (CTC)

The Child Tax Credit has been increased from $2,000 to $3,000 for kids age 6 to 17 and $3,600 for kids ages 5 and under. 50% of the credit will be paid monthly starting in July. To check your enrollment status, click here to view the online portal setup on the IRS website.

The plan also adjusted the threshold for the increased credit. To receive the full tax credit, your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household). If your income is above those thresholds, you can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint).

In order to opt of of the advance payments click here. For married couples, both spouses must opt out of the advance payments before the first Thursday of the month of the payment. If you have not opted out you may receive the first July payment.

Child and Dependent Care Credit (DCC)

The Child Dependent Care Credit was also increased for 2021. You may be able to take a larger tax credit in 2021 if you have a child in daycare or have an adult that you care for. You can now spend up to $8,000 in dependent care expenses for one qualifying dependent and get a 50% tax credit with the maximum credit of $4,000. If you have more than one qualifying dependent, you can spend up to $16,000 with the maximum credit of $8,000. To receive this full tax credit, your adjusted gross income must not exceed $125,000.

Earned Income Tax Credit

More taxpayers will now qualify for the Earned Income Tax Credit. The age limit was lowered from 25 to age 19 and the upper age limit has been eliminated. If you're a household with no kids, the maximum earned income tax credit increases from $543 to $1,502.

Biden's Capital Gain Tax Plan

To help fund the $1.8 trillion American Families Plan, Biden is calling for higher levies on capital gains and income for households making over $1 million. Biden proposed raising the top capital gains tax from 20% to 39.6. When combined with a Medicare surtax on investment earnings, the top federal capital gains tax rate would be 43.4%. This will affect short-term and long-term capital gains, since both would be taxed as ordinary income in the highest bracket.

For those who are looking to minimize capital gain taxes, here are four strategies for investors:

  • Time your sales- High- income investors may want to sell off their assets over time to keep their long- term capital gains beneath the $1 million threshold.
  • Harvest your losses- If your capital losses are greater than capital gains, you can claim up to $3,000 to lower ordinary income. You can also carry the loss forward to other tax years until they are fully claimed.
  • Invest in your retirement- Contributions to IRAs and 401(k)s are a tax-free alternative that is exempt from paying capital gain taxes. However, when you take out money from those retirement accounts, you will be taxed at your ordinary income tax rate.
  • Trim your income- If you're investing outside of a retirement account, you may want to wait until retirement to sell. Investors with a lower retirement income could minimize their capital gain tax. You can also reduce your taxable income by itemizing deductions as long as they add up to more than the standard deduction.

Calculating Your Net Worth

Knowing your net worth and understanding how it is changing over time is one the most important financial concepts and can help you achieve some of your financial goals. Your net worth impacts your credit score and is used by banks, mortgage companies and insurance companies. Here are three steps to calculate net worth:

  1. Reconcile your bank accounts and loans monthly.
  2. Calculate the value of all your remaining assets. Such as your automobiles, collectibles, investments, and most importantly your home.
  3. Add up all your asset values, then subtract all your debts such as your loans and mortgages. What you're left with is your net worth.