There are no two ways around it: childcare is expensive! In many cities, it can cost nearly as much as the mortgage or rent payment, which puts parents in a Catch-22: they have to work to afford childcare, but they need childcare in order to work! Factor in the costs for healthcare coverage, and there’s a ton of financial pressure on parents.
The Biden Administration recently took steps to help. As of July 15, 2021, qualifying households will receive monthly tax credit payments of $250 to $300 per child, with no additional action on their part.
Let’s focus on the big takeaways:
Which families and children qualify? For 2021, the child tax credit is $3,600 per child under the age of six, or $3,000 per child aged 6 to 17. Eligible households have children who are legal dependents and US citizens, US nationals, or US resident aliens.
How long do payments last? The IRS began immediate payments starting July 15, 2021, and they’ll continue through the next 12 months. Households that filed their taxes online will receive the payment as a direct deposit from the IRS. Payments will revert to the 2020 amounts and rules in 2022, unless the proposed American Families Plan becomes law. In that case, payments would extend to 2025 for qualifying households.
Make less than $150,000 per year? You‘re eligible. To claim the Child Tax Credit, households need to meet two sets of qualifications. First, the person receiving the credit must be a qualifying taxpayer, which means you live and pay taxes in the United States and earn less than certain income limits. The benefit begins to phase out for households earning more than $150,000 jointly ($95,000 single). Second, dependents must be younger than 18 years old.
What if you earn more than $150,000 per year? You may receive the Child Tax Credit even if you make up to $400,000 joint ($200,000 single). If you receive the $300 each month but your income disqualifies you from the payment, you have two options: do nothing or opt-out.
If you do nothing,you may have to pay back the credit you received. Consult with your tax professional for specific guidance.
If you opt-out of the payments because you expect to earn more than the income limit, you may still have to repay any money you received so far as part of your annual tax filing. It may make sense to opt out for other reasons, so be sure you fully understand your tax load. You can opt-out of the monthly payments on the IRS website.
The Child Tax Credit isn’t new legislation. It was originally enacted in 1997 to benefit low- and moderate-income families. Since becoming law, frequent amendments and restrictions narrowed the scope and made it difficult for the benefit to reach the lowest-income families.
The revised legislation seeks to address these issues by expanding qualifying households, simplifying payments, and covering those households who do not file taxes. Along with the broader American Rescue Plan, the Child Tax Credit is estimated to reduce childhood poverty by 50%, bringing the law closer to its original intent.
Think you may qualify but have questions about your household’s specific tax situation? After consulting with your tax professional, please schedule some time with our office to review how the Child Tax Credit may impact your financial plan!
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