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3 tax breaks included in Biden's economic 'rescue plan'

Janna Herron
·Editor
·4 min read

President-elect Joe Biden’s $1.9 trillion “rescue plan” released on Thursday calls for three key tax improvements for 2021 that would help Americans across the income spectrum.

The changes would apply to the Child Tax Credit, Child Care Tax Credit, and the Earned Income Tax Credit (EITC) and relieve some financial stress brought on by the pandemic and ensuing local shutdowns.

“Broad tax programs that direct cash to people can be very helpful,” Elaine Maag, principal research associate at the Urban-Brookings Tax Policy Center, told Yahoo Money when asked about the proposal. “People can use it to solve their individual needs.”

WILMINGTON, DELAWARE - JANUARY 14: U.S. President-elect Joe Biden speaks as he lays out his plan for combating the coronavirus and jump-starting the nation’s economy at the Queen theater January 14, 2021 in Wilmington, Delaware. President-elect Biden is expected to unveil a stimulus package with a price tag of trillions of dollars including a $1,400 direct payment to individuals who have been struggling with the economic turmoil caused by the COVID-19 pandemic. (Photo by Alex Wong/Getty Images)
President-elect Joe Biden speaks as he lays out his plan for combating the coronavirus and jumpstarting the nation’s economy at the Queen theater January 14, 2021 in Wilmington, Del. (Photo: Alex Wong/Getty Images)

Here are the proposed changes:

Child Tax Credit

Under Biden’s plan, the child tax credit would increase to $3,000 per child — or $3,600 for a child under 6 — for the year versus the current $2,000 per child now. It would also include 17-year-old children. Currently, the credit only applies to children under 17.

“That would be a move toward aligning the definition what child is to other parts of the tax code,” Maag said.

The Child Tax Credit would also be made fully refundable for the year, meaning families get a refund for the credit — even if it's more than what they owe. The credit is currently only partially refundable up to $1,400 and those who owe no tax must earn $2,500 to qualify for that $1,400.

“There’s no phase in,” explained Erica York, an economist at the Tax Foundation, when asked about the Biden proposal. “Everyone would get the maximum tax credit for their children. It’s really targeted at lower income households that are not receiving the full refundable credit.”

Families with children in bottom 20% of income distribution would get an average benefit of $3,400, while overall families with children would get an average benefit of $2,300, according to the Tax Policy Center. About half of the benefit would go to families in the bottom two income quintiles.

“This expansion would decrease child poverty by 45%,” Maag said. “This has a very huge impact on those very low-income families.”

BOSTON - DECEMBER 11: A woman and her daughter walk from  her elementary school after picking  up her breakfast and lunch in Revere, MA on Dec. 11, 2020. She is among many low-income parents in Massachusetts who have struggled to receive their promised free school meals during the pandemic. Her daughter's school offers meal pick-up from 10:30a.m. to 1 p.m., but her daughter only has a break from classes from 10:50 to 11:30, and so the single mother must strap her daughter in a jogging stroller and rush to the school a half-mile away since they don't have a car to pick up meals. (Photo by Suzanne Kreiter/The Boston Globe via Getty Images)
A woman and her daughter walk from her elementary school after picking up her breakfast and lunch in Revere, MA on Dec. 11, 2020. (Photo by Suzanne Kreiter/The Boston Globe via Getty Images)

Child Care Tax Credit

President-elect Biden also wants to expand this credit on an emergency basis for one year. Families would get a tax credit equal to 50% of their child care expenses for children under 13, up to $4,000 for one child and up to $8,000 multiple children.

The credit would also be refundable, and families who earn between $125,000 and $400,000 would receive a partial credit.

Before, the credit applied to only 25% to 30% of child care expenses — depending on income — with a maximum of $3,000 for one child and $6,000 for multiple children.

“This is really going to benefit middle and higher income families,” who typically have higher child care costs, Maag said. A previous analysis of a similar expansion of the credit conducted by the Tax Policy Center found half of the benefits would go to households in the top 40% of income distribution.

“It also tends to not benefit a large number of people,” Maag said. “Only about 15% of families with children benefit from this credit.”

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Earned Income Tax Credit

Biden’s plan also calls for expanding the Earned Income Tax Credit, or EITC, for the year by increasing the age and income eligibility requirements and providing a bigger benefit to childless workers.

Right now, only those making $16,000 or less qualify for this credit; Biden wants to raise that cap to $21,000. He would also would expand eligibility to workers 65 and older.

Childless workers would get nearly three times more — $1,500 versus $530 — from the credit under the proposal. Overall, childless workers receive only 3% of EITC benefits under current law; Biden’s expansion would increase that share to [between] 10% to 12%, Maag said. Three-quarters of the benefits from the EITC would also go the the bottom 20% of earners.

These tax changes are only for 2021, York pointed out.

“Currently, it’s one-year proposal to help with the pandemic and those who are affected by it,” York said. “But these likely will be popular changes, which would put pressure to extend or making them permanent.”

Janna is an editor for Yahoo Money and Cashay. Follow her on Twitter @JannaHerron.

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