The American Rescue Plan signed into law in March includes a big boost for parents: a significant increase in the tax credits for their children.
How will they work?
Here’s a look at the changes to the Child Tax Credit and what they mean going forward:
How much is the increase?
The American Rescue Plan increases the amount of the Child Tax Credit from $2,000 to $3,600 for children under the age of 6 and $3,000 for children between the ages of 6 and 17.
The credit’s scope has also increased—with children 17 and under covered. Before, the Child Tax Credit was limited to kids 16 and under.
According to Fox Business, the amounts are tapered off once income hits $75,000 for individuals and $150,000 for married couples. Those above the income threshold can still qualify for the $2,000 credit if their annual income is below $200,000 for individuals and $400,000 for married couples.
How will parents get the money?
Half the tax credit will be awarded through advance payments during the year. Parents eligible for the Child Tax Credit will receive payments periodically from July 1 through Dec. 31, 2021.
Families will likely receive monthly payments between $250 and $300 per child.
The IRS will establish an online portal where taxpayers can update information for mid-year adjustments (such as the birth of a child in 2021). The Treasury Department will also create a public awareness campaign to inform Americans about the program.
But this is still a tax credit, correct?
Yes, this is a tax credit. In fact, households eligible for the tax credit will get direct payments for half of the money upfront. The rest of the money will need to be claimed on your 2021 taxes when you file next year, according to CNET.
For example, if you had a $3,000 credit to claim, you would receive half of that in direct payments. You would then claim the other $1,500 in your 2021 taxes.
Why direct payments?
Because of the pandemic, many families are still struggling. Lawmakers believed families could use the money sooner rather than later and elected to award part of the credit as direct payments instead of having them wait until they filed their taxes next year to get the entire Child Tax Credit benefit.
Credits are fully refundable
The credit is fully refundable, meaning low-income households “will be entitled to receive the full credit benefit, as significantly expanded and increased by the American Rescue Plan.” Before, the credit had been only partially refundable
The credit is also being extended to Puerto Rico and the U.S. Territories.
Is this a one-time program?
For now, the changes to the Child Tax Credit apply to the American Rescue Plan for 2021. However, President Joe Biden and other lawmakers are calling for the changes to become permanent in an effort to lift families out of poverty.