The child tax credit is getting 4 big changes

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Families with children – especially those with low incomes – are ready to receive a bigger tax break next year.

The US $ 1.9 trillion rescue plan that President Joe Biden plans to sign on Friday changes the child tax credit significantly.

These changes to the tax code include increasing the balance, making it available for families with older children, and full reimbursement. The funds would be made available as a regular source of income from the end of this year, as opposed to a flat rate at tax time.

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According to the Urban-Brookings Tax Policy Center, Americans would receive an average tax cut of $ 2,700 as a result of the law changes.

The bottom fifth of earners (Americans who earn less than $ 25,500 a year) would receive the greatest impairment – an average increase of $ 3,800, according to analysis. Ninety percent of the low paid would get a break.

For comparison: around 39% of wealthy families would see an advantage. The top 20% would receive an average tax cut of $ 600, according to the Tax Policy Center.

The changes to the relief measure are temporary. From now on they would only be in force for one year.

Here’s what you should know about extended credit.

Amount and age

A tax credit lowers the overall tax burden.

Currently, taxpayers can claim a child tax credit of up to $ 2,000 per child under the age of 17.

The American rescue plan increases this amount to $ 3,600 for children under 6 and to $ 3,000 for older children.

According to the Tax Policy Center, around 3 in 4 families with children receive a higher tax credit than under current law.

Making sustainable payments to individuals and families is very different from the typical way the IRS works.

Elaine Maag

Principal Research Fellow at the Urban-Brookings Tax Policy Center

The legislation also extends the age of qualified children by one year. This allows families to apply for a loan for 17-year-olds.

There are income limits for child tax credit.

The full tax break is available to individuals earning up to $ 75,000 per year. Heads of household earning up to $ 125,000; and married couples filing a joint tax return earning up to $ 150,000.

The credit expires for higher earners.

Fully refundable

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As a result of the tax relief measure, the tax break will also be fully reimbursed.

There are two types of tax credit: refundable and non-refundable.

The Child Tax Credit is a refundable credit. Taxpayers will receive a refund even if the credit exceeds their total tax bill. In other words, the refund not only eliminates the tax liability, it also allows people to pocket the extra.

Currently, the child tax credit is partially refundable. Taxpayers can only get back up to $ 1,400 in total.

Wealthy families, who tend to have higher tax burdens, benefit most from this structure. You can generally claim the full value of the loan while someone with no tax liability is limited to a benefit of $ 1,400.

A single parent with one child must make at least $ 25,000 a year to receive the full $ 2,000, said Elaine Maag, a senior research fellow at the Tax Policy Center who studies income support programs.

Approximately 27 million children live in households that are not getting the full value of the loan because their parents’ incomes are not high enough, she said.

The American Rescue Plan makes the child tax credit fully refundable – which means low-income earners would get more money back.

Source of income

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Currently, the credit is available at a flat rate to taxpayers when they file their taxes (when they receive a refund).

The pandemic relief effort would make credit a regular stream of income for families.

According to the text of the law, the regular payments can arrive as early as July. Their frequency is unclear, but they can be monthly or quarterly, Maag said.

The timeline depends on when the IRS can reprogram its systems to accommodate the optimization.

“A sustainable payment to individuals and families is very different from the typical way the IRS works,” said Maag.

The income would technically be an advance on Americans’ expected credit for the 2021 tax season. They would receive half of that loan for recurring payments this year and the remainder during the tax season next year.

Legislation directs the IRS to set up an online portal through which taxpayers can opt out of regular payments. You can also use the portal to change information such as family size.

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