The IRS updates certain amounts for inflation each year. The 2021 inflation amounts were announced in late 2020. Some of these amounts have been changed by the American Rescue Plan Act of 2021 (ARPA or ARP Act; PL 107-2) such that the 2021 amounts that were previously announced do not apply for 2021. The IRS has now issued a Revenue Procedure that provides the ARPA-changed amounts.
Background—Inflation adjustments.
Many numbers in the tax code are adjusted for inflation each year. The IRS calculates these numbers and then publishes them in various Revenue Procedures. For example, the IRS published the 2021 inflation-adjusted amounts related to the Child Tax Credit (CTC) and the Earned Income Credit (EIC) in Rev Proc 2020-45, 2020-46 IRB 1016. (See Official inflation-adjusted tax rate schedule and other key tax figures for 2021—Part I (10/27/2020).
The IRS published the 2021 inflation-adjusted amounts related to the Premium Tax Credit (PTC) Applicable Percentage Table in Rev Proc 2020-36, 2020-32 IRB 243. See IRS announces 2021 ACA premium credit indexing adjustments (07/22/2020).
ARP Act changes to 2021 inflation adjustments.
The IRS has now issued a Revenue Procedure that list the amounts from Rev Proc 2020-45 and Rev Proc 2020-36 that have been replaced by ARPA, as follows:
Solely for tax years beginning in 2021, the ARP Act increases the refundable portion of the CTC to $3,600 for qualifying children under age 6 and $3,000 for qualifying children who have attained age 6 but not age 18 by the end of the 2021 tax year. (Code Sec. 24(d)(1) as modified by Section 9611 of ARPA)
Solely for tax years beginning in 2021, the ARP Act temporarily modifies the EIC for eligible taxpayers with no qualifying children and the applicable phaseout amounts for those taxpayers.
For 2021, the maximum amount of earned income on which the earned income tax credit will be computed is $9,820 (up from $7,100) for taxpayers with no qualifying children.
For 2021, the phaseout of the earned income tax credit will begin at $17,560 for joint filers with no qualifying children ($11,610 for others with no qualifying children). (Code Sec. 32 and modified by Section 9621 of ARPA)
For tax years beginning in or after 2021, the ARP Act increases, to $10,000, the amount of disqualified income (i.e., unearned income) a taxpayer may have and still qualify for the EIC. The ARP Act also provides that the $10,000 amount will be adjusted for inflation for tax years beginning after December 31, 2021. (Code Sec. 32(i) as modified by Section 9624 of ARPA)
For tax years beginning in 2021 and 2022, the ARP Act temporarily modifies the Premium Tax Credit (PTC) Applicable Percentage Table. Taxpayers use the Applicable Percentage Table to determine the amount of the PTC they may claim for a tax year. (Code Sec. 36B(b)(3)(A) as modified by Section 9661 of ARPA)
For tax years beginning in 2021 and 2022, the Applicable Percentage for purposes of the PTC is:
If household income is less than 150% of the federal poverty line, then the applicable percentage is 0%.
If household income is at least 150% but less than 200% of the federal poverty line, then the initial applicable percentage is 0% and the final applicable percentage is 2%.
If household income is at least 200% but less than 250% of the federal poverty line, then the initial applicable percentage is 2% and the final applicable percentage is 4%.
If household income is at least 250% but less than 300% of the federal poverty line, then the initial applicable percentage is 4% and the final applicable percentage is 6%.
If household income is at least 300% but less than 400% of the federal poverty line, then the initial applicable percentage is 6% and the final applicable percentage is 8.50%.
If household income is at least 400% of the federal poverty line, then the applicable percentage is 8.50%.
To continue your research on 2021 expansion of the CTC, see FTC 2d/FIN ¶A-4050.1. For the EIC, see FTC 2d/FIN ¶A-4200. For inflation adjustments to “applicable percentage” for the PTC, see FTC 2d/FIN ¶A-4245.1.
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