When President Joe Biden signed the $1.9 trillion-dollar American Rescue Plan last month, he launched a new and improved Child Tax Credit. The Child Tax Credit has been around since the Clinton Administration, yet this new version may have a positive effect on Americans who have been trying to find financial stability through the Covid-19 pandemic.
As with all new legislation, there are a lot of moving parts. From determining income requirements to who is a qualifying child, it is a dizzying array of details to determine which taxpayers will be allowed to take the credit.
Here is what we know so far:
The Credit Is a Monthly Payment In 2021
The new Child Tax Credit is currently only for 2021. For families that qualify, it will be a $3,600 credit for each child under age 6. For children ages 6 to 17, the credit is $3,000. Here is the big difference from prior tax credits: half of the credit will pay monthly starting in July through December.
Yes, that’s right. Every month for 6 months, the IRS is going to be depositing the Child Tax Credit into taxpayers’ bank accounts. That means for children under age 6, a payment of $300 will be deposited. For children ages 6 to 17, that amount would be $250 a month.
The remaining half of the credit will then be trued up on the 2021 income tax return that is filed in April of 2022.
For dependents over 18, the credit will be $500.
It Is Income Based And There Is A Phase Out
Like the stimulus checks for the Covid-19 pandemic, the new Child Tax Credit will be based on adjusted gross income (AGI). For single taxpayers, that is an AGI of $75,000 or less. For head of household, that is an AGI of $112,500 or less. Finally, for those filing married filing joint, it is an AGI of $150,000 or less.
But keep in mind that the credit is subject to a phase out. That means for every $1,000 a taxpayer earns over the AGI limit, their credit will be reduced by $50. For instance, if the taxpayer is a single filer with an AGI of $85,000, their credit will be reduced by $500 per child.
How To Qualify For The New Credit
The new Child Tax Credit is a 2021 tax credit. That means it will be based on a taxpayer’s 2021 income. However, in order to start paying it out in July, like the stimulus programs, the IRS is going to look at the 2020 income tax return that the taxpayer filed. If the taxpayer has not filed for 2020 yet, they will look back to the 2019 return.
One benefit for many taxpayers is that they still have to May 17, 2021 to file their tax return without an extension. Further it gives them an additional chance to provide the IRS with direct deposit instructions.
But keep in mind, as this is an AGI based program, if a taxpayer’s 2020 income is within the AGI to qualify, but their 2021 income exceeds the limitations and phase out, the taxpayer will need to payback the credit on their 2021 tax return.
The IRS Is Embracing Technology
While the new credit might be straightforward for some families, it won’t be for others. Situations where a new baby is born, a divorce occurs or a family might have too high an income in 2021 create challenges. While the IRS initially indicated that getting a portal set up in time for the July 1st launch was unlikely, in comments to the Senate Finance Committee on Tuesday, April 13th, IRS Commissioner Charles Rettig stated that, “We will launch by July 1 with the absolute best product we are able to put together.”
As a result, for taxpayers that have unique situations, they should keep an eye out for the new IRS portal to enter key data in regards to the tax credit.
Unique Situations Where A Child Hits Age Threshold
As the program is based on AGI and age, there will be situations where a child changes age groups during 2021. As a result, taxpayers will need to consider the child’s age on December 31, 2021. For instance, if a taxpayer’s 5-year-old turns 6 before the end of the year, they will qualify for the $3,000 credit not the $3,600. Similarly, if a 17-year-old turns 18 before December 31, 2021, they will only receive a $500 credit instead of $3,000.
The Existing Child Tax Credit Is Still Available
There will be many taxpayers who will not qualify for the new Child Tax Credit. However, keep in mind, the Child Tax Credit that was established in the Tax Cuts and Jobs Act of 2017 (TCJA), will still be available. This is a tax credit for single taxpayers with an AGI of $200,000 or less or taxpayers filing married with an AGI of $400,000 or less. This group of taxpayers will still qualify for a $2,000 tax credit for each child under age 17.
Keep in mind this group might also need to access the portal if their 2020 income would have them qualify for the higher credit.
More To Come
As we get closer to the July 1st rollout date, more details on the plan will be rolled out, including the IRS portal. In the meantime, taxpayers should focus on filing their 2020 income tax return as well as estimating their 2021 income to make sure that they qualify for this tax credit. It may be prudent to seek the help of a professional or use a number of the new Child Tax Credit calculators that are available.