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As many parents have surely heard by now, new tax credits are coming. The American Rescue Plan Act of 2021 (ARPA) offers a range of provisions designed to help families with their 2021 taxes, including expanded child tax credits that provide a fully refundable $3,000 to $3,600 tax credit per child for 2021, with half that amount available as regular stimulus-style payments later this year.
It's important to note that these new tax credits don't affect your 2020 taxes, due May 17, 2021. What they will affect: millions of American families. According to the Tax Policy Center, more than 90% of families with children will receive an average benefit of $4,380 under this new law. How will enhancements to the child tax credit impact your family? Here's what you need to know.
Answers to Your Expanded Child Tax Credit Questions
Many of the details pertaining to when direct payments will begin and other specifics are still being worked out. As of publication, this is what we know so far.
How much per child is the tax credit?
In 2021, parents earning up to $400,000 jointly or $200,000 as single or head-of-household filers receive a child tax credit of $2,000 for every child 17 years old or younger. Parents who meet additional income guidelines (see below) also receive an enhanced child tax credit: Families with children 5 and under may receive up to an additional $1,600 for a total credit of $3,600. Families with children 6 to 17 are eligible for an additional $1,000, or $3,000 total.
What are the income guidelines?
The expanded child tax credits start to phase out at the following adjusted gross income levels: $75,000 for single taxpayers, $112,500 for head-of-household filers and $150,000 for joint returns. The credit is reduced by $50 for every $1,000 over these income thresholds.
Families that do not meet these income guidelines may still qualify for the regular child tax credit of $2,000 per child if their incomes are below $400,000 for married couples filing jointly or $200,000 for single/head-of-household taxpayers.
Are all children eligible?
- Children must be U.S. citizens, national or resident aliens and have a Social Security number.
- They must be claimed as a dependent on your 2021 tax return.
- They must be related to you and live with you for at least six months during the year.
How will the IRS know whether or not you qualify?
The IRS will look at your most recent tax return for information on your income and dependent children to determine your eligibility to receive advance payments. If your information has changed since your last tax return, you'll have the opportunity to notify the IRS about the changes.
How do you receive the money?
Per the ARPA, you will receive half of your total 2021 child tax credits as advance payments. If you're expecting a total credit of $9,000 for your three qualifying children, for example, you can anticipate $4,500 in advance payments, divided into installments. The plan is to send six monthly payments from July through December; so in our hypothetical example, each payment would be $750. The IRS plans to make most of these payments by direct deposit. You can then claim the remaining half of your tax credit when you file your 2021 return.
What if your information has changed since your last tax return?
The IRS is creating an online portal that will enable taxpayers to opt out of advance payments or submit new information that may affect their eligibility for credits, such as the birth of a child or a change in income. In the meantime, stay tuned to IRS announcements for more information.
What if you receive more in benefits than you're entitled to?
You will reconcile your advance payments when you file your 2021 taxes. If you receive more in benefits than you're entitled to claim, you may be required to repay that amount along with your taxes, although there may also be allowances for taxpayers to keep all or some of the money based on income. Bottom line: If you know you're being overcompensated, notify the IRS to avoid a bill at tax time.
Are these payments taxable?
Advance payments are a tax credit and are therefore not taxable, though you will need to indicate how much you were paid on your 2021 taxes.
Do You Need to Take Any Action Now?
The IRS will do the legwork needed to figure out eligibility and distribute benefits, much as they did with stimulus checks. If the information in your most recent 2020 or 2019 tax return is still accurate and qualifies you for child tax credits, you don't have to do much except wait.
However, if any of the following items are on your to-do list, consider taking care of them now—or prepare to do so when the IRS is ready to receive information:
- If you haven't filed taxes for 2020, file now—even if your income does not require you to file. That's the fastest way to give the IRS the information it needs to get you started.
- Make sure each of your children has a Social Security Number.
- Set up direct deposit with the IRS.
- Make note of any changes to your income, filing status, number of children—anything that might change your eligibility to receive child tax credit advance payments since you last filed your taxes. When the IRS makes online reporting available, be sure to notify them of your new information.
Will Child Tax Credits Help Your Credit?
Child tax credits won't affect your credit directly. Any advance payments you receive won't appear on your credit report or be used to calculate your credit score. But, depending on how you use these credits, they may help you improve or maintain your credit in a few significant ways.
- Pay down debt. If you're carrying high-interest credit card debt, consider adding all or part of your money to your monthly credit card payment. You'll reduce the amount of credit you're utilizing—which can help raise your credit score—and save yourself money in interest.
- Avoid adding to your debt. Similarly, the money you receive can help you make purchases you've put off during the past year without utilizing your credit. Maybe your child would benefit from a new computer or joining a sports league as pandemic restrictions loosen.
- Invest in your creditworthiness. If you're still adapting to a new financial normal, this money could help you open up new possibilities. Tax credits may make it possible to get after-school care so you can work a full-time job and increase your income or provide seed money for a micro-business you can use to generate extra cash.
More Help for Families
Expanded child tax credits aren't the only help for families in the ARPA. Maximums on Child and Dependent Care Credits have been raised to $4,000 for one qualifying child and $8,000 for more than one. Low-income families may also be able to take advantage of the Earned Income Tax Credit and the additional child tax credit.
Democrats in Congress also hope to make this year's child tax credit expansion permanent. This could mean that a wide majority of American families would receive a form of ongoing guaranteed income each month. Additionally, together with other provisions in the ARPA, these tax credits could cut the child poverty rate to 6.5%, according to the Urban Institute, less than half what it is today. If you are among the taxpayers who will benefit, this is an investment in you and your family.