Today, we’re talking about the Child Tax Credit. This bill massively expands the Child Tax Credit for the year 2021 in ways designed to help families with children who have been struggling through the pandemic. Previously, the maximum amount was $2,000 per child, and up to $1,400 of that amount was refundable, meaning it could increase your refund if you didn’t owe any other tax. This bill increases the maximum credit to $3,000 per child 6 years old and up to $3,600 per child under 6. And, the entire amount has been made refundable. The bill also increases the maximum age of children with respect to whom the credit can be claimed from 16 to 17.
The American Rescue Plan does restrict the Child Tax Credit in one important way – it limits it exclusively to lower-income families. Previously, the Child Tax Credit was phased out for individuals making more than $200,000, $400,000 for joint-filing married couples. This bill lowers the initial phase-out thresholds to $75,000 and $150,000, respectively, and creates a new phaseout threshold for Head of Household filers beginning at incomes of $112,500. In practice, this means that while the Child Tax Credit is far more generous for those who qualify in 2021, only middle- and low-income households will qualify.
Finally, the American Rescue Plan also provides that the Child Tax Credit can be paid out in advance to eligible households periodically throughout the year rather than as part of a normal tax refund. In essence, it will act as a series of ongoing stimulus payments for households with children. Just like the direct stimulus payments, the IRS will estimate eligibility for the Child Tax Credit based on 2020 returns, or 2019 if 2020 hasn’t been filed.
While the advance payments are designed to provide direct assistance to struggling families as soon as possible, it is important to be CAREFUL because some people who receive more money through the advance payments than they end up being entitled to at the end of the year will be required to pay back the excess as additional tax. The IRS will set up an online portal where you can submit information that may change your Child Tax Credit eligibility, so keeping them up to date throughout the year can help prevent you from being surprised by a large tax bill at the beginning of 2022.
If you have any questions about your eligibility for the Child Tax Credit or the advance payments, it’s always a good idea to seek professional guidance. If you can’t afford to hire a lawyer, you may qualify for free advice from a Low-Income Taxpayer Clinic, like us. If you’d like to know more about our services, please check out our website or give us a call. Thanks for watching! Make sure to check out the rest of our videos about the American Rescue Plan and like and subscribe to our page!