AMERICAN RESCUE PLAN ACT OF 2021

When will the IRS send out the enhanced Child Tax Credit?

More families could benefit from an expanded Child Tax Credit with advance payments proposed in the American Rescue Plan Act. When could they be sent?

When will the IRS send out the enhanced Child Tax Credit?
SCOTT OLSON AFP

The $1.9 trillion covid-19 relief plan expected to be considered by the Senate this week contains several provisions to help struggling households across the country. On such proposal is an enhanced tax credit for families with children where families could claim up to $3,600 per child in 2021.

The Child Tax Credit is designed to help families cover some of the expense of raising children. In the House version of the American Rescue Plan Act of 2021, lower-income families will have access to this provision which could cut childhood poverty in half. To help stabilize household finances the measure calls for half of the credit to be paid out monthly in advance installments starting in July.

What is the Child Tax Credit?

The current Child Tax Credit is worth up to $2,000 per qualifying child under 17 and $500 per qualifying dependent. If the coronavirus relief package is approved in the Senate and signed into law, families could see a child tax credit of up to $3,600 per child under 6 and $3,000 per child under 18 for 2021. The proposal also makes the enhanced child credit fully refundable instead of a maximum refund of $1,400, so families will receive the credit even if they paid less in taxes than the total of the credit.

The child must be:

  • 17 or younger on 31 December, 2021 (*the current age limit is under 17)
  • be a U.S. citizen, resident, or national, and
  • have a Social Security number which you must provide on your tax return.
  • live with you for over half the year
  • provide less than half of his or her own support

Who is eligible for the enhanced child tax credit?

The provision in the covid-19 relief bill increases the number of households that qualify for the child tax credit. The current earnings floor whereby a family must earn a minimum of $2,500 per year to even qualify for the child tax credit would be removed for 2021.

Under the current tax law, the refundable amount is equal to 15% of your earned income over $2,500, up to the maximum $1,400 refundable credit, so if you owe less tax than the credit you will receive the remainder of the refundable portion of the credit as part of your refund. However, the $500 per qualifying dependent is not refundable, so it only reduces your tax burden and is not added to your refund.

The bill would set a cap to receive the maximum amount at $75,000 annual adjusted gross income (AGI) for individual taxpayers, $150,000 for joint filers and $112,500 for head of household. Above that threshold the benefit would phase out incrementally. After the phase out point for the enhanced child tax credit, the current child tax credit of $2,000 would apply with the size of the benefit starting to phase out for individual taxpayers with an annual AGI over $200,000, for joint filers AGI over $400,000.

When will families receive the advanced payments?

For families under the income threshold, they would receive a tax credit for the full $3,600 per child under 6 and/or $3,000 per child under 18. However, the American Rescue Plan Act calls for half the amount to be paid out in direct payments, similar to how the $1,400 stimulus checks in the same bill. The provision calls for the payments to go out monthly starting 1 July, through December. The remainder, $1,800/$1,500, would be available to families as a rebate when they file their 2021 income-tax filing in 2022.

Payments may be paid at longer intervals, it is up to the Secretary of the Treasury, Janet Yellen, to determine if monthly payments are feasible for the IRS to make. However, families could also opt to receive the credit in a lump sum when they file their income-tax return in 2022. The agency will also be tasked with setting up an online portal to allow families to change their status as their financial or family situation changes.