Workers Can Set Aside More in a Dependent Care FSA
For 2021, the maximum amount of tax-free employer-provided dependent care benefits increased from $5,000 to $10,500. An employee can set aside $10,500 in a dependent care FSA if their employer has one instead of the normal $5,000. Workers can only do that if their employer adopts this change. Health FSAs have an additional option of allowing participants to roll over up to $550 of unused funds at the end of the plan year and still contribute up to the maximum in the next plan year. Health FSA plans can elect either the carryover or grace period option but not both.
Childless EITC Expanded for 2021
For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC), a fully refundable tax benefit. In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don't qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.
Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.
Changes Expanding EITC for 2021 and Future Years
Singles and couples who have Social Security numbers can claim the credit, even if their children don't have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn't qualify for the credit.
Your investment income must be $3,650 or less. Starting in 2021 (filing in 2022) that amount increases to $10,000.
In 2021, you can qualify for the EITC if you’re separated but still married. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for at least six months out of the year, and must have a qualifying child living with them for more than half the year.
Child and Dependent Care Credit Increased for 2021 Only
For 2021, the top credit percentage of qualifying expenses increased from 35% to 50%. In addition, eligible families can claim qualifying child and dependent care expenses of up to $8,000 for one qualifying individual (up from $3,000 in prior years) or $16,000 for two or more qualifying individuals (up from $6,000 before 2021). This means that the maximum credit in 2021 of 50% for one dependent's qualifying expenses is $4,000, or $8,000 for two or more dependents. Important to note that when figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses.
Also of significance is that in 2021, for the first time, the credit is fully refundable. As such, an eligible family can get it, even if they owe no federal income tax.
Student Loan Forgiveness
The ARPA excludes federal student loan debt that is forgiven in 2021 through 2025 from gross income. The provision applies to student loans provided by the federal government, state governments, and eligible educational institutions, as well as certain private education loans as defined in the Truth-in-Lending Act.
Please contact our certified public accountant if you have questions or need additional information on how these changes will impact you.
