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Understanding the New Child Tax Credit

by
Spencer Wilson
on
3/29/2021
Understanding the New Child Tax Credit

Though the $1.9 trillion bill relief bill dubbed the American Rescue Plan was built around the economic issues created by the coronavirus, the truly historic aspect of the law President Joe Bident signed lies in its expansion of the Child Tax Credit (CTC) . Many experts are predicting that the law’s impact will be far reaching, with experts from the Institute on Taxation and Economic Policy predicting it could cut child poverty in the United States in half.  

The way that the credit will impact American families goes beyond a simple increase. Qualifying families will be offered the opportunity to take their credit in the form of a monthly payment, which is a first in the United States. Since the stipends will not be available before July, families who choose the monthly payments will receive a 2021 tax credit for the part of the year for which checks were not available. Once the checks begin to be issued – anticipated to be July, although nothing is confirmed – they will be sent every month until the end of 2021, when it officially expires. There is hope that the program will be extended or even made permanent, but that would require support from both Democrats and Republicans.

It’s anticipated that roughly 83 million children will benefit from the expansion and that their families will see an average total increase of $2,750 over their current tax credit.  Between the changes to the child tax credit, the extension of SNAP benefits, and the stimulus payments being paid directly to qualifying Americans, the overall package amounts to the most ambitious efforts by the federal government at solving child poverty in history.

What Did the Child Tax Credit Look Like Before? 

The best way to fully understand the impact of the new child tax credit is to view what came before and how it will differ. Up until the passage of the new law, families who qualified could receive up to $2,000 per child in the form of an annual tax credit. Tax credits are usually viewed as having more value to a taxpayer, as it directly cuts the amount of taxes owed by the amount of the credit, where tax deductions cut the amount of taxes owed by a percentage. A family in the 10% tax bracket  that owes $3,000 on their taxes that gets a $2,000 child tax credit only ends up owing $1,000, where a family in the same bracket that gets a $2,000 tax deduction could only cut their amount owed by 10%, or $200 – they would still owe $2,800. (Your tax bracket is determined by how much table income you earn and which filing status you use.)

Under the new law signed by Biden, the $2,000 child tax credit would increase to $3,600 for children under age six and to $3,000 for those between the age of 6 and 17 at the end of tax year 2020 (those 17-year-olds did not qualify for the credit under the previous child tax credit terms.) Another change from the previous child tax credit is that the new credit is completely refundable, whereas the previous one was only refundable up to $1,400. Taxpayers who don’t owe any taxes in 2021 will receive their full child tax credit as a refund.

So, who qualifies for the child tax credit under the new program? Any single filer whose modified adjusted gross income (MAGI) is $75,000 or less or any married couple whose MAGI is $150,000 or less. While the expanded tax credit is available to taxpayers earning a lower income  level than had previously been available, the previously available $2,000 child tax credit will still be available to those who were previously eligible - those earning up to $200,000 for individuals or $400,000 for married couples that have a qualifying child under the age of 17, with some exceptions. Everyone earning under $200,000 (or $400,000 for married couples) will see a child tax credit benefit.

New Child Tax Credit Introduces Monthly Payments

One of the most groundbreaking aspects of the new child tax credit is the ability for families to opt to have the credit provided as a monthly payment rather than as a credit on their tax return. The additional funds provided predictably each month provides those who choose this option with cash that can be used for whatever they choose, without restrictions. While some may spend on essentials like food, rent or medication, others may use the money to pay for childcare, school supplies, or even vacations or toys. No matter how each family chooses to use the money, it will make an enormous difference. 

To get a sense of the difference that these monthly payments will make, consider the impact on a family with three children that qualifies for the payment. If they choose to receive a monthly payment rather than a tax credit it will provide them with an additional $850 per month, which is slightly more than ten percent of the $8,175 that the U.S. Census Bureau says represents the average household income in 2019.

The payments are slated to begin in July, though there are few who believe the new process will be smooth or without initial administrative issues. The IRS will need to formulate a calculation similar to what was used to figure out the premium tax credits under the Affordable Care Act. This time the IRS will determine who is eligible and how much each monthly payment should be based on number of qualifying children, filing status and the taxpayer’s projected income based on either the taxpayer’s 2019 or 2020 tax return, depending upon which was most recently filed. The process will require a significant amount of effort, and there is a strong possibility that calculations that result in overpayment may lead to repayment to the IRS, or where those whose 2021 tax returns reveal income over that of 2019 or 2020, taxpayers may receive funds for which they are no longer eligible. With that in mind and to alleviate unnecessary stress for taxpayers whose 2021 is less than $40,000 for single filers or $60,000 for married couples, the American Rescue Plan specifically indicates that no repayment will be required.

If you have questions about the Child Tax Credit and how it may affect you, please contact your tax professional.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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