An increased child tax credit is part of President Biden’s stimulus package to help tackle the coronavirus pandemic and stimulate the economy. This stimulus package will provide lower-income parents with substantial financial assistance and support various other efforts to stimulate the economy. Even though the benefit of a tax credit traditionally isn’t available until after the tax return for the year has been filed, for 2021, the IRS will pay a portion of the credit in advance in the form of monthly payments from July through December.
Here are the details:
Additional Credit Amounts – Normally, the credit is $2,000 per eligible child. For 2021, it has increased to $3,000 for each child under age 18 (normally under age 17) and $3,600 for children under age 6 at the end of the year.
Refundability – A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the child tax credit is nonrefundable, but for 2021, it is fully refundable.
High-Income Phaseout – The credit is designed to only provide parents of lower incomes with a tax benefit. Thus, the credit phases out for higher-income taxpayers at a rate of $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold.
Advance Payments – Under a special provision included in the new tax law, to get the credit benefit into the hands of taxpayers as quickly as possible, the Secretary of the Treasury has been charged with establishing an advance payment plan. Under this mandate, those qualifying for the credit would receive monthly payments equal to 1⁄12 of the amount the IRS estimates the taxpayer would be entitled to by using the information on the 2020 return. If the 2020 return has not been filed, the 2019 information is to be used. If the 2019 return is used to determine the advance payments, the amount of the payments can be altered (either reduced or increased) when the 2020 return is filed. The initial advance payment won’t arrive before July 1, 2021, and monthly payments would end in December 2021. Any balance of the credit due to a taxpayer would be claimed on their 2021 tax return. Call Key2 Accounting today for more information.