Tax Credit Expansions
2021 American Rescue Plan: Tax Credit Expansions
What they mean for you and your family
As part of the 2021 American Rescue Plan, President Joe Biden made significant expansions and improvements to the Child Tax Credit (CTC), a tax benefit to help parents, grandparents, siblings and others with the costs of raising children. These one-year changes mean most people raising children will be eligible to claim the credit, even if they haven’t qualified for the credit in the past, or don’t have any income.
While the Child Tax Credit expansion has gotten more attention, the Rescue Plan also offers other important benefits that can get cash to you and your family, including the expanded Earned Income Tax Credit (EITC) and Child Care and Dependent Credit (CDTC). Learn more about the credits, what the changes mean, and how to access them below.
Child Tax Credit
‘The Child Tax Credit (CTC) is a tax benefit to help parents, grandparents, siblings, foster parents and others with the costs of raising children. Previously, many families did not qualify because they earned too little or their children were too old. Now, many more families are eligible, and for more money, which they can also start receiving almost a year early. Under the 2021 Child Tax Credit Expansion:
- There is no minimum income requirement. Whether you earn money from a full-time or part-time job, from Social Security benefits or Supplemental Security Income, or even if you don’t earn any income, you’ll likely be able to get the credit.
- You might get more money. Families can receive $3,000 for each qualifying child ages 6-17, and $3,600 for each qualifying child under the age of 6. Before the credit was expanded, the maximum amount was $2,000.
- The qualifying age for children is raised: Children under 17 can qualify you for the credit. Last year, children had to be under 16 to qualify.
- You can get the money early. You can start receiving the credit this July in monthly payments of $250 – $300, OR you can wait until next tax season in 2020 to receive the full amount of the credit in one payment.
There are 3 main eligibility requirements for the Child Tax Credit:
- Income: There is no minimum income requirement to claim the full 2021 CTC. However, the credit amount will start to decrease when you make $75,000 or higher ($150,000 for married couples).
- Social Security Number: You, your spouse (if applicable) must have a Social Security Number or ITIN and your child(ren) must have a Social Security Number.
- Children claimed must be considered ‘qualifying:’
- Age: Must be 17 or younger on December 31, 2021
- Child must live with the recipient in the US for more than half the year.
- Child must be considered a dependent for filing purposes.
You can also check to see of you are eligible for advance payments of the Child Tax Credit here: Advance Child Tax Credit Eligibility Assistant
There are two ways to receive the 2021 Child Tax Credit:
1. You can start receiving the credit early, in monthly amounts of $250-$300 starting this July. These are called “advance payments.” You’ll receive the rest of the credit in 2022 when you file your tax return.
2. If you don’t want to receive the credit early and in monthly payments, you can receive the full credit amount in one lump sum in your refund in 2022 when you file your tax return. Refer to the next section to learn how to opt out of the monthly payments.
Unenroll from Receiving Advance Payments
The Child Tax Credit Update Portal allows people raising children to look at their CTC eligibility, look at their expected CTC advance payments, and, if they wish to do so, unenroll from receiving the advance payments. If you choose to unenroll, you will receive the full credit amount in 2022 when you file a 2021 tax return.
How to Claim the 2021 Child Tax Credit and Get Advance Payments
If you haven’t already, you’ll need to file a 2020 tax return – even if you don’t have any income or don’t normally file. If it’s your first time filing, or you need filing help, you can:
- Get help from Accounting Aid Society. Appointments are available year-round and can be scheduled here.
- Prepare and file your own return online for free. Step-by-step guidance and assistance is available through chat and telephone: FreeFile delivered by TurboTax
- Go to a paid tax preparer. Going to a paid preparer can be expensive, and it’s important to choose your tax preparer carefully. Even when someone else prepares your return, you are responsible for the information on the return, including any errors. Luckily, there are tips and steps you can take to make sure your preparer is experienced and trustworthy: How to Choose a Paid Tax Preparer
Shared Custody and Advance CTC Payments
Parents who share custody cannot both claim the child Tax Credit. It is important for parents who share custody to determine which parent will claim the child or children on 2021 tax returns to be filed in 2022. That parent will be the one eligible for advance Child Tax Credit payments. If a parent claims a child without being entitled to do so, advance Child Tax Credit payments will be withheld from the ineligible parent’s 2021 tax return to be filed in 2022. This ‘clawback’ penalty can have significant repercussions for tax compliance.
If a child is a qualifying child for more than one person/both parents, the IRS has several determining factors to identify which parent is eligible to claim the qualifying child:
- If only one of the persons is the child’s parent, the child is treated as the qualifying child of the parent
- The IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year.
- If the child lived with each parent the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year.
Please consult a tax professional if you are uncertain which parent is eligible to claim the credit. More detailed information about dependents of divorced or separated individuals can be found in IRS Publication 504.
Earned Income Tax Credit
Unlike the expanded Child Tax Credit, families will need to have earnings from work to qualify for the expanded Earned Income Tax Credit. However, the one-year expansion still provides significant benefits for workers, especially those without children, who were previously left out of the credit. Here are the important changes:
- Credit amount increased for childless adults: The maximum credit amount for workers without children claimed as dependents has increased from about $542 to around $1,500.
- Income limit raised for workers without children: from $15,980 to $21,920 .
- Eligibility age range expanded: Workers ages 19-24 and workers 65 and older can qualify for the expanded EITC.
If you qualify for the Earned Income Tax Credit, you’ll need to file a 2021 tax return next tax season (in 2022). Even though the 2022 tax season is many months away, it’s important to be aware of the credits now so you’ll be ready to claim them when the time comes.
The Child Care and Dependent Tax Credit
The Child Care and Dependent Tax Credit helps working people cover the costs of caring for a child or dependent with disabilities.
The changes to the credit will provide families with a tax credit of 50% of up to $8,000 in costs per child/disabled dependent, and $16,000 for two or more.
If you qualify for the Child Care and Dependent Tax Credit you’ll need to file a 2021 tax return next tax season (in 2022). Even though the 2022 tax season is many months away, it’s important to be aware of the credits now so you’ll be ready to claim them when the time comes