When President Joe Biden signed the $1.9 trillion American Rescue Plan into law Thursday, headlines heralded the third wave of stimulus checks that are soon to hit American bank accounts. Families with children got some additional good news in the form of big changes to the Child Tax Credit.
Changes to the tax code include increasing the value of the credit, making the credit available to families with older children, and making the credit fully refundable. The changes will result in Americans getting a $2,700 tax cut, on average, according to the Urban-Brookings Tax Policy Center.
The overhaul comes with some quirks, too. For one, it's only in effect for 2021 for now, though Democrats hope to make the changes permanent. And unlike most tax credits, half of the credit could be distributed to many families in advance, with monthly cash payments beginning in July. The other half will be credited at tax time next spring.
Read on to find out who qualifies for the credit, and use the calculator below to find out how much your family could potentially get.
Under the American Rescue Plan, taxpayers can claim a credit of up to $3,600 per child under the age of 6 and up to $3,000 for children ages 6 to 17.
Previous rules allowed you to claim a maximum $2,000 for children aged 16 and under. The expansion of both the amount parents receive and the eligible children they can claim means that about three in four families with children will receive a larger tax credit than under the previous law, according to the Tax Policy Center.
Another change: You don't have to earn an income to get the credit. This is a departure from the previous rules, which required households to earn at least $2,500 in a given tax year to qualify.
How much you receive is based on your 2020 income. If you've yet to file your 2020 return by the time you begin to receive the credit in the form of advance payments, the IRS will use your 2019 return information.
Video by Stephen Parkhurst
You'll qualify for the full credit if you're a single filer with a modified adjusted gross income of less than $75,000, a single parent filing as head of household with a MAGI less than $112,500, or a married couple filing jointly with less than $150,000 in income. The credit phases out for taxpayers who exceed those thresholds.
Wealthier families who may not qualify for the enhanced credit in 2021 can still claim the previous credit of up to $2,000 per child, which begins to phase out at $200,000 in income for single or head-of-household filers and at $400,000 for married couples filing jointly. It's unclear whether families claiming the previous credit will receive advance payments on their credit or whether they'll have to wait to claim it when they file their taxes. "I'm not sure we will 100% know until we see how the portal is set up," says Sarah Shannonhouse, a CPA and the manager for tax practice and ethics at the American Institute of Certified Public Accountants.
The new legislation makes this tax break fully refundable. Unlike a nonrefundable tax credit, which can only bring your tax bill down to $0, a refundable credit such as the new version of the Child Tax Credit can generate a tax refund, if it exceeds what you owe.
The old version of the credit was partially refundable with taxpayers only able to claim an excess refund of $1,400. Under the new law, you get to keep the full credit amount, regardless of how much it would exceed what you'd otherwise owe.
That can add up to a big refund. Consider a married couple with three children, ages 3, 10, and 15, whose tax liability before the credit was $5,000. If they opted out of monthly payments and instead qualified to claim the full credit next spring for each of their children ($3,600 for the toddler and $3,000 each for the other two kids), the resulting $9,600 credit would more than wipe out their liability and result in a refund of $4,600.
Video by Stephen Parkhurst
One major difference between the advance payments for the stimulus and those for the Child Tax Credit: If you've received more money than you're entitled to via the Child Tax Credit, you may have to pay some of the money back. That could result in a surprise tax bill for some taxpayers.
The IRS will use your latest tax information to calculate your advance payments of your 2021 credit. But if, say, you earn a lot more money in 2021 than you did in 2020, you could have to pay back the amount by which your refund exceeded what you were supposed to be paid.
Not everyone is subject to this potential clawback, though, and those with lower incomes are less likely to have to pay the money back. Single filers who make less than $40,000, single heads of household who make less than $50,000, and joint filers who make less than $60,000 are entitled to keep up to $2,000 of credit erroneously paid in advance.
The amount you're allowed to keep phases out up to a certain income level. Single filers making up to $80,000, heads of household earning up to $100,000, and joint filers making up to $120,000 can all keep some of the credit if they're overpaid. Filers above those thresholds will be subject to the full clawback.
The new legislation directs the IRS to pay taxpayers 50% of their estimated credit for 2021 from July 1 through December 31, 2021, with the remainder to be paid out when you file next April. The bill's reference to "periodic payments" likely means that taxpayers will receive their advance credit in equal monthly installments, experts say. That means if you qualify to receive a $3,000 credit for your child, you could receive six monthly installments of $250 followed by a $1,500 credit when you file your return.
Distributing a tax credit early in the form of a check is unusual for the IRS, but the agency has now had plenty of practice distributing stimulus checks, which are also a predistributed tax break. If you didn't receive either of the first two rounds of stimulus money, you can claim it as a break on your 2020 taxes.
More from Grow:
- $1,400 checks, a $3,600 child tax credit, $300/week unemployment: 7 ways the American Rescue Plan could help you
- ‘Almost everyone gets a benefit’ with the new Child Tax Credit of up to $3,600: Here’s how and when parents will get payments
- $1,400 stimulus check calculator: Find out how much money you could get under the American Rescue Plan