Due to a recent change in child tax credit, parents may soon receive monthly payments from the IRS.
IRS Commissioner Charles Rettig said Tuesday that the agency was on track to issue that aid in July.
Here's what taxpayers need to know about the tax credit and income stream.
Child tax credit
The American Rescue Plan, a $ 1.9 trillion Covid Relief Bill signed by President Joe Biden in March, has improved child tax credits in several ways.
The changes are temporary – they only apply to taxes of 2021 (i.e. during next year's tax season) unless Congress extends them or makes them permanent.
The credit is available to families with children.
Before the new law, families were given a loan of $ 2,000 per qualified child – usually dependent on those under the age of 17.
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Single adults with incomes up to $ 200,000 (and married joint applicants earning $ 400,000 or less) received the full value of the loan. The amount fell by $ 50 for every $ 1,000 of income beyond those limits.
This structure remains.
However, according to the Congressional Research Service, the American bailout plan offers lower and middle earners greater benefits. Higher income families generally receive the same credit as under the previous law.
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For one thing, the law raised the age of qualified children from 16 to 17 years. (This benefits recipients across the income scale.)
Some families have a higher maximum balance: $ 3,000 per child ages 6-17 and $ 3,600 for younger children.
Single adults receive the full value of this larger loan if their annual income is $ 75,000 or less. (The income threshold is $ 112,500 for head of household filers and $ 150,000 for married joint filers.)
This larger loan amount gradually decreases for higher income taxpayers.
(The actual income level at which credit drops to the original level of $ 2,000 per child depends on the number and ages of qualified children, according to Congressional Research Service.)
The law also made the loan fully recoverable.
Previously, Americans could get up to $ 1,400 of the balance as a tax refund. Taxpayers were only eligible for a refund if they had earned income of at least $ 2,500. Now there is no upper limit on the amount of reimbursement and the income threshold has been removed – particularly helpful changes for low-paid workers.
The law also instructed the finance department to start issuing the credit in regular installments starting July 1 – a departure from the typical flat-rate refunds once a year at tax time.
Rettig told the Senate Finance Committee Tuesday that the IRS was ready to begin monthly payments in July.
That income is technically an advance on half a taxpayer's expected loan amount in 2021. So parents would get up to $ 300 per month per child and $ 250 per older child.
Anyone who qualifies for a child tax credit can receive the advance.
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However, according to Elaine Maag, principal researcher at the Urban-Brookings Tax Policy Center, the regular source of income will be particularly helpful for low-income earners.
It could help poor households reduce food insecurity and better manage monthly bills, she said.
"Families with very low incomes often have low incomes because their wages go up and down," says Maag. "That's bad for kids."
While the IRS predicts that payments will be made monthly, they can ultimately be made quarterly, depending on what the agency can manage, she said.
There is one caveat: taxpayers must file a tax return in order to receive the prepayments. This also applies to people who normally do not submit a return.
Taxpayers receive the remaining half of the child tax credit when filing their 2021 tax return (during the 2022 tax season).
"People should submit these now so that they are eligible for the payments," Maag said of tax returns.
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"But if not, they can still get the full child tax credit," she added. "They'll just get it the way they normally would when they file their taxes next year."
The IRS extended the deadline for filing taxes for 2020 tax returns by one month to May 17.
An online portal the IRS will launch this year will allow parents to opt out of prepayments – and choose to receive full credit at tax time in 2022.
This portal will also be important for another reason: it will allow taxpayers to update information that may have changed since filing their tax return and which would therefore change the size of their loan.
This may include changes in income, enrollment status, or the number of children.
The IRS estimates monthly prepayments based on data from the 2020 income tax return (or, if not available, a 2019 tax return).
Taxpayers who receive a larger advance than they can claim usually have to repay the deductible. This could be the case, for example, when a taxpayer gets a higher-paying job or a child now lives with another parent or relative.
Protection against repayment
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However, low wage earners can be protected from having to repay some of the funds.
According to the Congressional Research Service, up to $ 2,000 per child would be protected from repayment if the error was due to net changes in the number of eligible children.
However, loan amounts over $ 2,000 would still have to be repaid.
Individual filers with an income of less than $ 40,000 will receive the full Safe Harbor amount. (The income threshold is $ 50,000 for heads of household and $ 60,000 for married couples filing a joint tax return.)
The $ 2,000 amount will gradually expire as income increases. Individual applicants with incomes greater than $ 80,000 (or $ 100,000 for heads of household and $ 120,000 for joint applicants) would not receive a Safe Harbor Benefit.