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Congress just passed a significant increase in a tax credit that experts say will dramatically reduce child poverty and reach more than 90% of American children.
The child tax credit changes are one of the key provisions of the American Rescue Plan Act, a $ 1.9 trillion stimulus package that includes expanded unemployment benefits and the long awaited $ 1,400 economic reviews. President Joe Biden signed the law on Thursday.
According to the New York Times, around 69 million households are expected to benefit from the child tax credit expansion in 2021, compared to an estimated 48 million last year.
In the current version, parents can use the balance to claim up to $ 2,000 per year for each qualified child in their care. The expansion increases that number to $ 3,600 per child under 6 and to $ 3,000 for all other children under 18 – including dependent 17-year-olds previously deemed ineligible.
The bill also removes the income floor that previously barred the poorest families from access to credit by requiring a minimum earnings of $ 2,500 per year to qualify.
Perhaps the biggest change, however, is that the bill allows a portion of the loan to be paid out in monthly prepayments instead of being counted against federal income taxes.
So if you are a parent or legal guardian, or become one in 2021, there is a high chance that you have been affected. Tax law can be laden with confusing jargon and buzzwords. So we've broken down everything parents need to know.
Who is included in the extended authorization?
The American Rescue Plan Act outlines two major changes to child tax credit eligibility in 2021.
First, the age limit will be raised from under 17 to under 18. This temporarily closes a loose ending that has bothered parents for decades.
For the past few years, you could only apply for a $ 500 loan instead of the full $ 2,000 if you had a dependent 17+. And before 2018, 17-year-olds were not eligible for credit. Instead, parents could apply for a dependent exemption that allows them to exclude a certain amount of income from their taxes.
While the stated goal of the Child Tax Credit, one of three child tax breaks, is to help eradicate child poverty, critics have long noted that it actually does relatively little to help the poorest families, given that you had to earn at least $ 2,500 per year to qualify. To resolve this problem, the invoice extends the eligibility by removing this lower profit limit altogether.
Getting a tax credit into the hands of people who normally wouldn't have to pay any income tax at all takes a few extra steps, so the other changes for 2021 – partial prepayment of the tax credit and full refund – are essential.
What are the new income requirements?
The tax cuts spearheaded by the Trump administration in 2017 increased income restrictions on taking full child tax credit. But now lawmakers are stepping back to target the larger payments to low- and middle-income households.
Under the new rules, the increased tax break would expire at $ 75,000 in adjusted gross income for individual applicants, $ 112,000 for heads of household and $ 150,000 for joint applicants.
By comparison, in 2018 and 2019, exit rules only started at $ 200,000 for single and household heads and $ 400,000 for joint applicants.
This raises one major criticism of the expansion: for families (especially single parents) in expensive metropolitan areas like San Francisco or New York, lowering the income threshold without taking local inflation into account leaves many middle-income people out.
How do the payments work?
Perhaps the most significant change to the 2021 tax credit is that the bill spreads half of the credit ($ 1,800 for children under 6 and $ 1,500 for eligible older children) through monthly payments from the IRS between July and December 2021.
While it is still unclear how these payments will be distributed or whether parents will need to sign up manually, a preference for direct deposits is indicated on the invoice.
Under the current child tax credit, parents have had two ways to get the money, neither of which involves monthly cash payments.
The first is to pre-claim each eligible child on your W-4. The amount of federal income tax deducted from each paycheck for that year is then reduced to reflect the number of your claims.
The second option is to skip the allowances for your W-4, pay income taxes as normal, and then claim the number of children on your return during tax season and get a refund for the amount of money overpaid.
With the changes, parents will still have the option to choose one of these routes. From July, however, they will receive half of their balance through cash payments.
Here's what it would look like: Let's say you are a married couple making less than $ 150,000 and you have two children under the age of 6. You are eligible for the maximum loan amount of $ 3,600 per child for a total of $ 7,200. In the second half of the year, you'll get half of that – $ 3,600 – in monthly payments of $ 600.
By paying a portion of the benefit in the form of monthly payments upfront, parents who range from the impoverished to the blue-collar worker and middle class have more cash to spend year round.
While the extra money is apparently intended to benefit families whose annual spending per child is about $ 12,000 more than child-free households, the child tax credit is not a welfare program like the Supplemental Nutrition Assistance Program (SNAP) or temporary assistance for families in need (TANF). So there are no restrictions on what you can and cannot spend the money on.
What does "fully refundable" mean anyway?
The new improvements make the balance fully refundable, whereas previously it was largely considered non-refundable (although some low-income families qualified for a partial refund up to $ 1,400). This is another step in ensuring that the lowest-income parents who owe less federal income taxes have more money in their pockets.
Under the previous rules, if the amount of child tax credits you qualified for is greater than the amount of income tax you owe, the residual value of the credits will not be paid to you – this is the "non-refundable" portion. For example, if you owe $ 2,500 in federal income tax and qualify for $ 4,000 in child tax credits, your federal income tax will only be reduced to zero.
However, in the same scenario, you can qualify for a refund of the balance. This means that $ 4,000 will cover your $ 2,500 tax liability and you will receive the remaining $ 1,500 after filing your taxes.
So how much money do parents get?
It would not be an unfair assessment to say that the American Rescue Plan Act is the most generous stimulus plan for parents to date. With the child tax credit increase by more than 50%, millions of families are likely to see more money in their bank accounts. But the total amount most parents get from the stimulus package is actually much higher.
In addition to the expanded child tax credit, the bill temporarily increases the income restrictions and child and dependent care tax credit value to offset child and dependent care costs for working families.
The balance, which was also fully refunded, previously had a maximum value of $ 2,100. The new maximum for 2021 is up to $ 4,000 for one child expenses and $ 8,000 for childcare expenses for more than one child. The level of income for the start of the loan expiration has also increased significantly, from $ 15,000 to $ 125,000.
Parents who qualify for the next stimulus check will receive $ 1,400 each plus $ 1,400 for each addict, including adult relatives, who were excluded from previous stimulus checks.
If the aforementioned family of four qualify for both tax credits and full stimulus checks, they are expected to receive $ 20,800 from the federal government later in 2021.
How long will these changes take?
While the changes to the Child Tax Credit represent a significant overhaul of some of the most backward features of the Tax Credit, it is important to understand that all of these changes are temporary. For the time being, they only apply to the tax year 2021.
Many supporters and lawmakers are pushing for the changes to be permanent, and some want to go further to restructure the way family benefits work.
Most recently, Senator Mitt Romney (R-UT) proposed that most of the social and tax credits for children be cut altogether and replaced with a family allowance of up to $ 15,000 per year. And in 2019, Sens. Sherrod Brown (D-OH) and Michael Bennet (D-CO) proposed permanently converting the child tax credit into annual child benefit of up to US $ 3,600 per child.
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