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American Rescue Plan: The Child Tax Credit Expansion, Explained

·4 min read
child tax credit
child tax credit

The American Rescue Plan, which was signed into law by President Joe Biden on March 11, 2021, includes a number of measures aimed at easing economic pressure on American families. In addition to a third round of stimulus checks sent directly to millions of taxpayers, the plan also temporarily expands the child tax credit from $2,000 per child to as high as $3,600 for the 2021 tax year. Half of the credit amount will be paid in advance in installments, and the other half will be claimed by families on their tax returns next year.

If you’ve got tax credits and stimulus checks headed your way, a financial advisor can help you plan the best way to this money.

Child Tax Credit: American Rescue Plan Changes

Previously, the child tax credit provided $2,000 per child up to the age of 16. Under the American Rescue Plan, the amount and eligibility is expanded: The credit is now worth $3,000 for children between the ages of 6 and 17, and $3,600 for children under 6. Normally, families must have taxable earnings of at least $2,500, but the plan temporarily eliminates that requirement.

President Biden’s plan also makes the credit fully refundable for tax year 2021. Before then, the credit was only partially refundable up to $1,400. That meant that if qualifying taxpayers had zero tax liability – that is, they didn’t owe any money on their tax return – then the IRS would only pay up to $1,400 of the remaining credit amount as a refund. Under the new rules, the entire credit may be taken as a tax refund.

This increased payment is phased out for wealthier families. The tax break begins to phase out at $75,000 for single returns, $112,500 on head of household returns, and $150,000 on joint returns. Essentially, the increased payment goes down by $50 for every $1,000 earned above the limit. The previous credit of $2,000 per child is still available subject to an upper income limit of $400,000 for married couples and $200,000 for individuals.

Wondering how much you’ll receive as a result of these changes? SmartAsset’s calculator will break down payments based on your information:

Child Tax Credit: What Is It?

The child tax credit is an existing credit for parents of children under the age of 17. In a normal, non-pandemic-impacted year, the credit is for $2,000 per child for all parents earning less than $400,000 per couple ($200,000 for single parents). The credit is reduced by 5% of total income above the limit for parents earning more than that. Keep in mind that this is a tax credit, not a tax deduction, which means that the money is credited directly to the taxes you owe the federal government, not deducted from your taxable income.

If the money owed to you from the tax credit is bigger than the taxes you owe, you can get up to $1,400 of the credit in the form of a refund.

How and When Will You Receive the Credit?

As noted above, for this year, parents can get some of their tax credit back in the form of direct payments in the second half of 2021, ahead of filing their taxes next year. Up to half of the credit can be paid to these parents in monthly installments starting in July 2021.

These payments will be made automatically based on the family’s 2020 tax return. The rest would be applied after 2021 taxes are filed in early 2022.

The Bottom Line

The Child Tax Credit is an existing program that reduces the tax burden of families with dependent children. For the 2021 tax year, the program has been expanded to give bigger checks to parents, allow more of the credit to get refunded, and allow families to get an advance on their refund in the second half of this year.

It’s important to keep up with the latest developments to know what type of aid you could qualify for. You can find other relief programs at the federal government help center and our list of coronavirus relief programs by state.

Tax Tips for Families

Photo credit: ©iStock.com/Geber86

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