Parents may soon start getting monthly payments from the IRS, due to a recent change to the child tax credit.
IRS Commissioner Charles Rettig said Tuesday that the agency was on track to start issuing that aid in July.
Here’s what taxpayers need to know about the tax credit and income stream.
Child tax credit
The American Rescue Plan, a $1.9 trillion Covid relief law that President Joe Biden signed in March, enhanced the child tax credit in a few ways.
The changes are temporary — they apply only to 2021 taxes (i.e., during tax season next year) unless Congress extends or makes them permanent.
The credit is available to families with kids.
Before the new law, families got a $2,000 credit per qualifying child — generally a dependent under 17 years old.
Single adults with up to $200,000 of income (and married joint filers earning $400,000 or less) got the credit’s full value. The amount fell by $50 for every $1,000 of income over those limits.
That structure remains in place.
But the American Rescue Plan offers a larger benefit to low and moderate earners, according to the Congressional Research Service. Higher-income families will generally get the same credit as under prior law.
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For one, the law raised the age of qualifying kids to 17, from 16. (This benefits recipients across the income scale.)
Some families will get a larger maximum credit: $3,000 per kid ages 6 to 17 and $3,600 for younger children.
Single adults qualify for the full value of that larger credit if their annual income is $75,000 or less. (The income threshold is $112,500 for head-of-household filers and $150,000 for married joint filers.)
That larger credit amount gradually reduces for taxpayers with higher income.
(The actual income level at which the credit falls to the original $2,000-per-child level depends on the number and age of qualifying children, according to the Congressional Research Service.)
The law also made the credit fully refundable.
Previously, Americans could get up to $1,400 of the credit as a tax refund. Taxpayers only got a refund if they had at least $2,500 of earned income. Now, there’s no cap on the refund amount and the earned-income threshold was erased — especially helpful changes for low earners.
The law also directed the Treasury Department to issue the credit in regular installments starting as early as July 1 — a departure from the typical lump-sum refunds once a year at tax time.
Rettig told the Senate Finance Committee on Tuesday that the IRS would be ready to start monthly payments in July.
This income is technically an advance on half a taxpayer’s expected 2021 credit amount. So, parents would get up to $300 a month per young child and $250 per older kid.
Anyone who qualifies for a child tax credit can get the advance.
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But the regular income stream will be especially helpful to lower earners, according to Elaine Maag, a principal research associate at the Urban-Brookings Tax Policy Center.
It may help poor households reduce food insecurity and better manage monthly bills, she said.
“Very low-income families are often low income because their wages are bouncing up and down,” according to Maag. “That turns out to be bad for children.”
While the IRS is forecasting the payments will be monthly, they may ultimately come quarterly, depending on what the agency can manage, she said.
There’s a caveat: Taxpayers must file a tax return to get the advance payments. That’s the case even for people who don’t typically file a return.
Taxpayers will get the remaining half of the child tax credit when filing their 2021 tax return (during the 2022 tax season).
“People should be filing those right now so they’re eligible for the payments,” Maag said of tax returns.
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“But if they don’t, they’ll still be able to get the full child tax credit,” she added. “They’ll just get it as they normally would when they file their taxes next year.”
The IRS extended the federal tax filing deadline for 2020 returns by a month, to May 17.
Parents will be able to opt out of the advance payments — and elect to receive the full credit at tax time in 2022 — on an online portal the IRS will roll out this year.
Paying back the IRS
That portal will be important for another reason, too: It’s where taxpayers can update information that may have changed since they filed their tax return and which would therefore alter the size of their credit.
That may include changes in income, filing status or number of children.
The IRS estimates monthly advance payments based on data from one’s 2020 income tax return (or, if unavailable, a 2019 return).
Taxpayers who receive a larger advance than they’re eligible for will generally have to repay the excess. That may occur, for example, if a taxpayer gets a higher-paying job or a child now lives with another parent or relative.
Protections from repayment
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Low earners may be protected from having to repay a portion of the funds, though.
Up to $2,000 per child would be shielded from repayment if the error is due to net changes in the number of qualifying children, according to the Congressional Research Service.
However, credit amounts exceeding $2,000 would still have to be repaid.
Single filers with less than $40,000 in income qualify for the full “safe harbor” amount. (The income threshold is $50,000 for heads of household and $60,000 for married couples filing a joint return.)
The $2,000 amount gradually phases out as one’s income rises. Single filers with more than $80,000 of income (or, $100,000 for heads of household and $120,000 for joint filers) wouldn’t get any safe harbor benefit.