Tax changes offer big benefits for families

Tax season is still some weeks away, but with a large number of changes coming into effect this year, it’s smart to plan ahead. Various COVID-19 stimulus bills introduced a number of updates to different tax provisions, while higher-than-typical inflation has tweaked many thresholds. 2021 tax changes may affect individuals and organizations too.

The American Rescue Plan featured a large one-year expansion of the child tax credit, increasing the credit from $2,000 to $3,600 for children 5 years or younger, and to $3,000 for other kids.

However, the extra amount is reduced for single filers earning more than $75,000 and joint filers earning more than $150,000. The 2021 credit is fully refundable and there’s no $2,500 earned income requirement this year either.

The American Rescue Plan also temporarily expanded the child and dependent care tax credit, with helps defray the costs of child care for children under 13 or dependent adults. Last year, families could claim $3,000 in expenses and a maximum of $6,000 per year. For 2021, claimable expenses per dependent jump to $8,000 with a maximum of $16,000. Families can receive up to 50 percent of these expenses as a refundable credit. Credits phase out for individuals and families earning more than $125,000.

Inflation substantially boosted the annual Social Security wage base. In 2020, Social Security taxes, including the employer’s 6.2 percent contribution, had to be paid on all income below $137,700.

In 2021, this base jumps to $142,800.

Keep in mind that companies that suspended collecting and paying Social Security payroll taxes in 2020 must now collect deferred taxes by the end of the year. As a result, some employees may see more money withheld from their checks to cover Social Security obligations.