While the Senate made some changes to the House bill, titled the American Rescue Plan Act of 2021, the final version signed Wednesday by President Joe Biden includes a provision that expands the Child Tax Credit for a year.
Currently, the Child Tax Credit equals $ 2,400 for each child under the age of 17 who is claimed as a dependent and who has a Social Security Number.
To qualify, the child must live with the taxpayer who claims it for at least six months during the year.
The credit begins to phase out if your Adjusted Gross Income (AGI) is more than $ 400,000 on a joint return, or more than $ 200,000 on an individual or head of household return. Up to $ 1,400 of the child credit is refundable for some low-income people with children, but they must have earned income of at least $ 2,500 to get a refund.
But the American Rescue Plan approved Wednesday by the House of Representatives made several important changes and now allows 17-year-olds to qualify as well. It also increases the credit to $ 3,000 per child ($ 3,600 for a child under age 6) for many families and eliminates the $ 2,500 earnings floor. Likewise, it allows half of the credit to be prepaid by authorizing the IRS to send periodic payments to families from July 2021 through December 2021.
DO ALL FAMILIES BENEFIT FROM FINANCIAL AID?
Not all families with children would get the highest child credit. The improved tax exemption would begin to be eliminated from the Adjusted Gross Income of $ 75,000 in individual returns, $ 112,500 in returns of heads of household and $ 150,000 in joint returns.
WHICH ANNUAL STATEMENT WILL THE IRS USE TO EVALUATE THE CRITERIA?
Under the proposal, the IRS will rely on the 2020 return to determine the criteria for the credit. If the taxpayer has not yet filed a 2020 return, the IRS will use the 2019 returns. Families that do not meet the criteria for the highest child credit can still claim the regular credit of $ 2,000 per child, minus the amount of the monthly payments they received, as long as their AGI is below the current thresholds of $ 400,000 on joint returns and $ 200,000 on other returns.
HOW WILL PERIODIC PAYMENTS BE ESTABLISHED IN 2021?
As for advance payments, the plan requires the IRS to send a check (usually in the form of direct deposits) periodically from July to December. These periodic payments would represent half of the child tax credit in 2021.
For example, if monthly payments were made, this would result in payments of up to $ 250 per child ($ 300 per child under age 6) for six months and would be a nice windfall for many families.
Take a family of five with three children ages 12, 7, and 5. Assuming the family qualifies for the highest child credit, then they could receive $ 800 per month from the IRS from July through December, for a total of $ 4,800. And the family could also claim the additional $ 4,800 in child tax credits when they file their 2021 return next year.
Democratic lawmakers want the IRS to start making payments in July, giving the agency just a few months to set up its computer systems to handle a new massive but temporary payment program.
The plan also requires the IRS to develop an online portal for people to update their income, marital status, and the number of qualifying children. People who want to opt out of receiving advance payments and instead take the full child credit on their 2021 return can do so through the portal.
SOME EXCESS PAYMENTS WOULD NOT HAVE TO BE REFUNDED
Certain families are likely to receive an overpayment from the IRS, but the new plan requires that that money not be reimbursed to the tax agency for low- and moderate-income taxpayers.
Families with 2021 adjusted gross income below $ 40,000 on a single return, $ 50,000 on a head of household return, and $ 60,000 on a joint return would not have to repay any excess credit payments they receive. On the other hand, families with adjusted gross income in 2021 of at least $ 80,000 on a single return, $ 100,000 on a head of household return, and $ 120,000 on a joint return would have to repay the full amount of any overpayment when File your 2021 tax return.
Families with 2021 adjusted gross income between those thresholds would have to repay a portion of the overpayment.
IS THE IRS PREPARED FOR THE CHALLENGE?
Many tax experts and some legislators wonder if the IRS, with its outdated computer systems, reduced workforce, and efforts focused on other tasks, has the ability to make periodic child credit payments, especially if the child tax credit Children improved and advances become permanent, which could happen.
Some Senate and House Democrats believe that making the new child tax credit permanent would help reduce child poverty.
But the IRS would need more funds in case the regular payments are implemented permanently. While the House bill authorizes an additional $ 400 million for the tax agency to take over the additional work, some experts question whether this is enough.
The IRS says that to facilitate advance credit payments, it would have to build a system to calculate and recalculate payments as taxpayers provide new information. Such a system must also be able to issue and track payments, as well as reconcile all payments sent to each taxpayer during the year with the taxpayer’s credit taken on the tax return. The agency would also need to develop a schedule that marks statements that do not accurately include all advance payments received during the year.
Another problem is the potential for fraud. The IRS estimates that in 2019 it paid $ 7.2 billion in refundable credits under fraudulent returns.
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