The Coronavirus pandemic ushered in a number of federal economic relief packages to Americans over the course of the last year. One of those is the Child Tax Credit Expansion, which will begin sending payments to approximately thirty-nine million American households beginning July 15. What exactly is this benefit, and how do you know if you’ll receive it?
HOW THE CHILD TAX CREDIT EXPANSION WORKS
This federal benefit is an expansion of the already existing child tax credit that can be taken for people with children to reduce tax liability. First introduced in 1997, the child tax credit has gone through a number of expansions. The most recent being a direct result of the Covid-19 relief legislation that was passed in March. And while this benefit is technically a credit for reducing taxes owed, the temporary changes as a result of the Covid relief package, make it more akin to a monthly child allowance.
Previous to 2021, the child tax credit was $2,000 for each child that was under 17 years old. As part of the Covid-19 relief package, this amount has now been increased for 2021 only to $3,000 for children ages 6 to 17 and $3,600 for children under age 6 years old.
For all intents and purposes, the income limits that previously existed on the low end of the income range have been removed for 2021. Previously, if a household fell into the low-income category and did not owe income taxes, they could receive up to $1,400 of the available $2,000 credit. This year, however, that has changed, so they’ll be able to receive the full credit, even with no income.
There are still some limits for high-income households. The portion of the credit that has been expanded begins to phase out once income reaches $75,000 for individuals, $112,500 for heads of household, and $150,000 for married couples. However, the $2,000 base credit for higher-income households is still in place. That portion of the credit will phase out if income reaches $200,000 for individuals and $400,000 for married couples.
Payments will begin to go out on July 15 and continue on a monthly basis (the 15th of every month), for the remainder of 2021.
The credit is divided into twelve monthly payments, so every month, qualifying households will receive one-twelfth of the annual credit. With payments beginning in July, taxpayers will have received half of the benefit by the end of the year. The remainder will be applied to 2021 tax returns filed in 2022.
To receive payment, the IRS utilizes tax return information from 2019 or 2020 returns to verify eligibility and make payments. If the IRS has direct deposit information on file, the payments will be sent electronically and without the taxpayer needing to take any action. If there is no bank information on file, those taxpayers will receive either debit cards or paper checks in the mail.
Taxpayers can also decline the payment if they so choose. There will be an online portal available through the IRS, which will allow taxpayers to opt out of monthly payments if they’d rather claim the entire credit on their tax return.
If taxpayers do not normally file returns (typically very low-income households), they can still receive the benefit. There will be an online system (similar to that used for stimulus payments) for non-filers to provide their information so that the IRS can send payments.
It remains to be seen how exactly this expanded tax credit will be handled going forward. President Biden wants to extend the expanded credit through 2025 and many Congressional Democrats are pushing to make it permanent. For now – without further action by Congress – the expanded benefit is due to expire at the end of 2021 and revert back to the previous amount of $2,000 for each child under 17.