$3,000/$3,600 Child Tax Credit: what to know about the stimulus coming in 15 July

One of the most beneficial features of the American Rescue Plan for American taxpayers with children is the expanded Child Tax Credit. Depending on the age of your children you could receive up to $3,600 for each child.

The Child Tax Credit has been around for decades, but with the push to fight inequality and poverty nearly ninety percent of families will now be able to take advantage of the credit’s revamp. Gone is the earnings floor that denied the credit to lower income households causing some to call the expanded and enhanced credit a step toward universal basic income.

How does the Child Tax Credit work?

The Child Tax Credit was last adjusted in 2017 with the Tax Cut and Jobs Act. This saw the credit expanded to $2,000 per child, but only $1,400 of that was refundable. Further more, in order to claim the refundable portion of the credit a filer had to show earned income of more than $2,500. Above that the taxpayer could claim only a portion of the refundable part of the credit until their income allowed for the whole of the refundable portion.

Now that the earnings floor has been removed and the credit is fully refundable, it is expected that childhood poverty could be reduced by half in 2021. But the measure will be temporary with the changes set to expire at the end of year. President Biden has said that he wants to extend the expansion until 2025, when the changes made in 2017 will expire as well, dropping the credit back to $1,000. The hope is that the enhanced credit will prove so popular that voters will want the changes to be made permanent. Congressional Democrats, for they part, want to make the credit permanent starting this year as part of the American Families Plan.

Families can chose to receive the credit now or later

The IRS will automatically determine who is eligible for the credit this year based on taxpayer's 2020 tax returns, and if it hasn’t been processed yet a 2019 tax return. The agency is currently working on setting up an online portal which taxpayers can use to update their family or economic situation making them eligible for a larger, or smaller payment. The portal is set to be up and running by 1 July.

Families can opt out of receiving the monthly direct payments slated to begin 15 July, and choose instead to receive a lump sum payment as part of their tax refund in 2022. There are several reasons a family might opt out of receiving the monthly payments. Some may use it as a way of saving up for a big purchase, others to avoid having to return any of those advance payments.

Why you might have to return the advance payments

With advance payments on last year’s information, or even from 2019, there are sure to be some overpayments. Although the legislation creates a “safe harbor” for lower- and moderate-income taxpayers, above a threshold taxpayers would need to repay any overpayments they received.

Households with adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return and $60,000 on a joint return won't have to repay any overpayments on the Child Tax Credit that they receive. However, those households making at or above $80,000, $100,000 and $120,000, respectively, will need to repay the entire amount of overpayment. For households with earnings in between these thresholds, they will need to repay a portion of any overpayments received.

How will the Child Tax Credit be paid?

Families could receive a monthly payment of $300 per child under 6 and/or $250 per child under 18 at the end of the year. The IRS have confirmed that the payments will begin 15 July and be paid on the 15th of every month through December, “unless the 15th falls on a weekend or holiday, allowing families who receive the credit by direct deposit to plan their budgets around receipt of the benefit.”

The monthly payments will cover half the total credit and next year when taxpayers file they can claim the remainder of the credit on their 2021 tax return. However, if a family wishes they can opt out of the advance monthly payments and claim the whole credit as a lump sum when they file next year. Currently the IRS doesn’t have information available on this option but will post new information as it becomes available on the Advance Child Tax Credit Payments in 2021 website.

How much will families receive per child?

Eligible families can receive up to $3,000 per child between the ages of 6 and 17 at the end of 2021. Each child under age 6 at the end of 2021 could qualify for up to $3,600. The credit is fully refundable so if a family owes less than the amount of the credit, they will receive the excess as a tax refund.

Under the American Rescue Plan taxpayers can claim a non-refundable credit of up to $500 toward the child tax credit for 18-year-old dependents and dependents between the age of 19 and 24 who are attending college full-time. There won’t be an advanced payment on this credit.

Who is eligible to receive the enhanced Child Tax Credit?

Under the new legislation, individuals will qualify for the full enhanced Child Tax Credit if their annual earnings are below $75,000; or a joint income of up to $150,000 for married couples, widows and widowers and $112,500 for heads of household. If your earnings are above those limits, you will receive a reduced credit which gradually phases out $50 for every $1,000 over the threshold.

The IRS will determine eligibility based on 2020 tax returns, or 2019 returns if a taxpayer’s 2020 tax return hasn’t been filed and processed yet. To be eligible a taxpayer must have their main home in the US for more than half the year. Other than filing a 2020 tax return there is no further action necessary to sign up for the program, the IRS will calculate a taxpayer’s eligibility.

The IRS urges taxpayers with children to file a 2020 tax return as soon as possible, if they haven’t already, to get the correct amount from the tax credit. This includes those with no income who are eligible to receive the credit but not normally required to file taxes. The agency also recommends using direct deposit to receive their refund and the advance payments faster.