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Democrats propose giving parents up to $3,600 per child: Here's who qualifies and what you need to know

Democrats are proposing a tax break that would give most American parents up to $3,600.

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A woman and her daughter receive food assistance for laid off Walt Disney World cast members and others at a food distribution event on December 12, 2020 in Orlando, Florida.
Paul Hennessy | NurPhoto | Getty Images

Democrats are proposing a tax break that would give most American parents financial aid of up to $3,600 per child.

On Monday night, House Democrats unveiled a plan that would dramatically expand the Child Tax Credit for 1 year. The proposal — which would be included in the 3rd Covid-19 relief package — institutes a fully refundable Child Tax Credit for 2021 and increases the maximum amount to $3,000 per child ages 6 to 17 and $3,600 annually for children under the age of 6.

In an effort to get the money out quickly, the plan proposes sending a monthly payment of $250 to $300 instead of a 1-time annual payment incorporated into your tax return. This would be a major increase from the current Child Tax Credit, which only provides an annual maximum of $2,000 per child from birth through age 16.

Here's what you need to know about the Democrats' plan to increase the Child Tax Credit.

What is the Child Tax Credit?

The current Child Tax Credit provides parents up to $2,000 per qualifying child under the age of 17. To qualify, parents must meet a number of criteria, including having an annual income of at least $2,500. The amount they receive depends on their earnings, among other factors.

The current Child Tax Credit is nonrefundable, meaning it can reduce your tax liability to zero, but you won't get a tax refund for any remaining value of that credit. If that's the case, however, you may be able to qualify for the Additional Child Tax Credit, which is refundable and worth up to $1,400.

How the Child Tax Credit could change

The proposed Child Tax Credit expansion is a "real shift in how we think about tax credits," says Elaine Maag, a principal research associate at the Urban-Brookings Tax Policy Center.

Under the proposal, there would no longer be an earning requirement to receive the credit. "That's very important, particularly now when we have relatively high unemployment rates. So the tax credit would deliver benefits to all low-income children, whether or not their parents are working," says Maag.

The proposed tax credit would also be fully refundable.

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A 3rd key change: The IRS would deliver the 2021 tax credit to Americans before they file their 2021 taxes, and as early as this July, in the form of direct payments, similar to the way stimulus checks were delivered.

Under the proposal, the Treasury Department would issue advance payments of up to half of the 2021 Child Tax Credit and would base eligibility on families' latest tax information on file with the IRS, likely either their 2019 or 2020 tax return.

Who's eligible for the proposed credit?

Under the current Child Tax Credit, parents must have an annual income of at least $2,500 to start claiming the benefit, but the amount they receive depends on their earnings. That means many low-income and unemployed Americans get excluded, says Maag.

Under the House Democrats' proposal, the amount of aid Americans receive would be based on their adjusted gross income, with no minimum required. Couples who earn up to $150,000 a year and single parents who earn up to $112,500 a year would be eligible to receive the maximum $3,000 a year per child ages 6 through 17 and $3,600 per child younger than 6.

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If you earn more than those income levels, you would be eligible for a reduced payment.

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 a single or head-of-household filers and at $400,000 for married couples filing jointly.

This expansion would make most American families eligible for some added aid. Under the current rules, around 90% of families with children are expected to receive an average Child Tax Credit of $2,380 in 2020, according to a Tax Policy Center estimate.

Aid would target low-income families

"The way we have the policy structure today means about 27 million low-income children do not receive the full $2,000 per child because there are not enough earnings in their household," Maag explains.

Roughly 1 in 7 kids live in poverty in the U.S., according to the most recent data from the Census Bureau. That's one of the highest child poverty rates in any wealthy country. For minorities, poverty is even more prevalent. More than one-quarter of Black children and one-fifth of Hispanic children live below the poverty line.

The tax credit would deliver benefits to all low-income children, whether or not their parents are working.
Elaine Maag
principal research associate at the Urban-Brookings Tax Policy Center

"That low-income proportion has been widened by the pandemic so that's why there's an urgent need for some sort of credit," says Maag.

If implemented, the credit could help cut the U.S. child poverty rate in half, according to research from the Center on Poverty and Social Policy at Columbia University.

Payments could be distributed monthly

In an effort to get the payments out quickly, the legislation calls for the IRS to send out monthly payments of $250 to $300, depending on your child's age. Those advance payments would total up to half of the credit's value.

This could pose a challenge for the IRS, Maag says: "It is a very different way to deliver tax credits that the IRS does not have a lot of experience with." But it helps that the IRS has had experience delivering stimulus checks.

If there is any overpayment of the credit, low-income households won't need to repay the government when they file their taxes in 2021. The plan outlines that individuals making less than $40,000 ($60,000 for couples filing jointly) will not need to give the money back, nor will it be garnished from wages. But critics point out that higher-earning households could find themselves with a surprise tax bill.

Why it's important to file your tax return early this year

To make sure you receive Covid-19 related financial aid, "it's a good idea to file your taxes early this year," Maag says. "The sooner you get your information to the IRS, the sooner they can incorporate that information when they deliver either an advanced Child Tax Credit, or if there's another economic impact payment."

The legislation still has hurdles to overcome. The House of Representatives and Senate will have to OK the measure before it would be signed into law. And it's not the only idea of its kind under consideration. Lawmakers are proposing similar child tax credits, and some of them even hope to make the increased aid permanent.

This story has been updated to clarify figures around the tax credit phaseout.

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