AMERICAN RESCUE PLAN

$3000/$3600 Child tax credit: can I apply for it if I ask for unemployment benefits?

The American Rescue Plan enhanced and expanded the Child Tax Credit, making it available to more Americans with lower incomes by removing the earnings floor.

$3000/$3600 Child tax credit: can I apply for it if I ask for unemployment benefits?
STEFAN WERMUTH AFP

What might be one of the most consequential features of President Joe Biden’s $1.9 trillion covid-19 relief bill enacted in March could be the changes to the Child Tax Credit. For the 2021 fiscal year families will be able to take advantage of an increased fully-refundable tax credit available to more households. The bill envisioned part of that credit being sent out as monthly payments, starting in July.

The enhanced Child Tax Credit will no longer require households to earn at least $2,500 to begin to see the benefits from the credit. This will mean that families who have no income will be able to take advantage of the tax provision. This could see US child poverty nearly halved and bring some financial stability to many families raising children.

How does the enhanced Child Tax Credit work?

The new system provides a refundable tax credit of $3,000 for children aged from 6-17 and $3,600 for children who are under the age of six for the 2021 fiscal year. Families could receive a payment of $300 per child under 6 and/or $250 per child under 18 per month. The provision calls for the payments to go out monthly starting 1 July, through December although the IRS Commissioner Charles Rettig told Congress that the agency might not have the resources to meet that date or even send the payments monthly. The bill contemplated that sending the payments monthly might be too tall an order for the IRS to meet.

Ideally families would receive half of the credit in 2021 through direct payments, similar to how the $1,400 stimulus checks in the same bill are sent. If the payments were to begin in July, the American Rescue Plan Act (ARPA) calls for that half of the credit to be paid in advance by December. The remainder, $1,800/$1,500 per child, would be available to families as a rebate when they file their 2021 income-tax filing in 2022.

Can I receive the Child Tax Credit if I receive unemployment compensation?

Before the changes to the Child Tax Credit only parents who received “earned income” above $2,500 were eligible to begin receiving the refundable portion of the credit. “Earned income” as defined by the Internal Revenue Service is the compensation you receive from employment and self-employment. The agency specifically excludes any unemployment compensation you receive from your state from this definition. Even though unemployment compensation is taxed, it was excluded from the credit.

Under the new changes for the 2021 fiscal year all families who have Social Security Numbers and are under the eligibility threshold, regardless of whether they have income, will have access to the federal checks and the remainder of refundable credit when they file their income tax returns in 2022. Additionally, a related change triples the size of the Earned Income Tax Credit, which also is intended to benefit the poor, expanding eligibility to a lower age limit of 19 and removing an upper age limit.

Who is eligible for the enhanced Child Tax Credit?

Under the new legislation, individuals will qualify for the enhanced Child Tax Credit if their annual earnings are below $75,000; or a joint income of up to $150,000 for married couples. If your earnings are above those limits, you will receive a reduced credit which gradually phases out and end for individuals earning $95,000 and married couples earning $170,000 filing jointly. Above those limits the rules for the previous Child Tax Credit will apply.

How to claim the enhanced Child Tax Credit

Taxpayers who are eligible for the enhanced child tax credit and file a 2020 tax return this year along with a Schedule 8812 with their 1040 tax form will be automatically signed up to receive the payments. The IRS has stressed that filing this year will be important to take advantage of new tax provisions included in the American Rescue Plan Act. People will also be able to claim any stimulus money that they were eligible for but haven’t received yet.

Enhanced Child Tax Credit will reduce childhood poverty

By removing the earnings floor of $2,500 to begin to be eligible for the Child Tax Credit many more low-income households will be able to benefit from the tax provision. These changes will put more money in families’ pockets and extend the credit to children who are left behind by the current credit. According to a report by the Institute on Taxation and Economic Policy (ITEP), approximately 83 million children live in households that would benefit from the new Child Tax Credit legislation.

Experts believe that this Child Tax Credit expansion will dramatically reduce child poverty. According to the Urban Institute, a Washington DC think tank that carries out research into economic and social policy, relief measures such as the third stimulus check and the new child tax credit will help the US to bring a previously-projected 2021 poverty rate of 13.7% down to 8.7% - and will more than halve child poverty in the country. The lowest-income families would see their disposable incomes boosted by 37.4%.

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