Can I get the child tax credit or the child care tax credit, and what are the differences?
The new stimulus bill provides a financial boost for working families, but how does the new entitlement for parents and guardians compare to the existing provision?
Since the American Rescue Plan was first unveiled in January, President Joe Biden has spoken extensively about the financial relief needed to support struggling and low income families.
The pandemic has increased wealth disparity in the United States and he is attempting to address it in the $1.9 trillion stimulus bill. One of the key provisions is a substantial increase in the child tax credit allowance, which is sent to parents and guardians to assist with the cost of children.
Democratic Rep. Richard Neal was heavily involved in crafting the legislation and released a statement outlining the reasons for the change:
"The pandemic is driving families deeper and deeper into poverty, and it's devastating. We are making the Child Tax Credit more generous, more accessible, and by paying it out monthly, this money is going to be the difference in a roof over someone's head or food on their table.”
But how much is the child tax credit worth, and how does it differ from the child care tax credit that was first introduced in 1976?
What is the Child Tax Credit?
The child tax credit is currently a form of tax relief available to American taxpayers for child dependents under the age of 17 at the end of the tax year. The existing credit is partly refundable, meaning that recipients who pay little or no tax will only get a proportion of the total amount.
In 2017 the child tax credit was upped to $2,000 per year and has been an important weapon in the fight against childhood poverty. A report from the Center on Budget and Policy Priorities found that “the CTC lifted approximately 4.3 million people out of poverty in 2018, including about 2.3 million children, and lessened poverty for another 12 million people, including 5.8 million children.”
The American Rescue Plan would make three key changes to the child tax credit, affecting the top amount, the payment method and the eligibility requirements. The new bill would see the total annual sum increased to $3,600 for children aged under six and $3,000 for children aged between six and 17.
The payments would no longer be distributed in an annual tax credit, but in the form of a monthly direct deposit to provide more consistent support.
The new child tax credit will also be fully refundable, meaning that eligible parents and guardians will receive the full $3,600/$3,000 regardless of how much they have paid in taxes.
What is the Child and Dependent Care Tax Credit?
The child and dependent care tax credit (CDCTC) was introduced to help working families cover the expenses associated with the care of children and adult dependents.
After increases in 2001 and 2012 the current allowance covers the cost of between 20-35% of qualified expenses up to a maximum of $3,000 for each qualifying child. The total amount that filers can claim is $6,000, meaning that working parents can claim a maximum of $2,100 towards to cost of childcare (35% of $6,000).
The IRS describe the CDCTC entitlement as “a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income.”
To see you are eligible to receive the Child and Dependent Care Credit, the IRS have an online tool to check if you could claim.