By Richard Ruben
Payments will go to about 39 million households
The child tax credit is a federal benefit that reduces income tax liability for people with children. It was created in 1997 and since then has expanded several times. It is a credit that reduces taxes owed as opposed to a deduction that reduces taxable income. The temporary changes in effect for 2021 make it a near-universal monthly child allowance, far from the annual tax break it started as. The changes came about as part of the $1.9 trillion Covid-19 stimulus bill passed in March.
Here is how it works.
How big is the credit?
Until 2021, the credit was $2,000 per child under age 17, based on the child’s age at the end of the year. For 2021 only, Congress increased the credit to $3,000 for children ages 6 to 17 and $3,600 for children under age 6.
Are there limits based on income?
On the low end, there were limits, but they have been removed for this year. Until 2021, low-income households that didn’t owe income taxes could get as much as $1,400 of the $2,000 credit. This year, they can get the full credit even if they have no income.
On the high end, some limits are still in place. The expanded portion of the credit starts phasing out once income reaches $75,000 for individuals, $112,500 for heads of household and $150,000 for married couples. The base $2,000 credit for higher-income households remains, and that phases out once income reaches $200,000 for individuals and $400,000 for married couples. Your Money Briefing
How the Expanded Child Tax Credit Payments WorkStarting next month, about 39 million American families will begin receiving expanded federal child tax credit payments. Tax reporter Richard Rubin joins host J.R. Whalen to discuss how the payments work, who is eligible and why some families might choose not to receive them.Subscribe
When do the monthly payments start?
The Internal Revenue Service will make the first payments on July 15. They will continue monthly for the rest of the year on the 15th of every month, unless that falls on a holiday or weekend.
How big will the payments be?
Each month, households will get one-twelfth of the annual credit, so they will generally have half the credit by the end of 2021 and get the rest on the 2021 tax return they will file in early 2022. So a single parent who makes $60,000 and has an 8-year-old would get $250 a month starting in July.
How many people are getting the payments? And what does it cost?
The payments will go to about 39 million households, covering 88% of U.S. children, according to the Treasury Department. The expanded credit is costing the government just over $100 billion this year.
Why is the government making monthly payments?
Advocates for the expansion say the program can be more effective in helping parents and children if they have the money sooner rather than waiting to file a tax return to get it.
Will the payments reduce people’s expected tax refunds?
Perhaps. A household that was expecting to use the $2,000 credit against its 2021 tax liability in early 2022 will instead get $1,000 during the second half of 2021 and only have $1,000 more on the return.
That may be less of a concern for some households because of the expanded size of the credit and because only half of it is coming in advance through the monthly payments. So a married couple making $120,000 with a 3-year-old and a 9-year-old would have normally expected to have a $4,000 child tax credit on the tax return. Now, they will get $3,300 during 2021 and will have the other $3,300 on the tax return.
The IRS will send people notices at the end of the year that they can use when reconciling the payments with the ultimate credit.
Do you have to do anything to get the monthly payments?
In most cases, no. The IRS will use information from 2019 or 2020 tax returns to establish eligibility and make payments. About 80% of recipients have direct-deposit information on file with the IRS and will get the payments automatically. Others will receive paper checks or debit cards.
Can you decline the payment?
Yes. The IRS has set up an online system that lets people opt out of monthly payments if they prefer to claim the entire credit on the tax return. The IRS also set up a system, the Child Tax Credit Eligibility Assistant, that lets people figure out whether they can get the money. People can use the Child Tax Credit Update Portal to provide the IRS with new bank account information. Giving the government that information by Aug. 2 will update the information in time for the Aug. 13 payment and all subsequent ones. In the future, the IRS will debut systems that will let people update their family status, income and address.
What if you don’t normally file tax returns?
The IRS established an online system that lets non-filers—typically very low-income households—provide their information to the government. This is similar to the online tool the government used for the stimulus payments last year and this year.
Can you update your bank account and family information?
The IRS is setting up systems that let people update their information more frequently than the annual tax return, and people can now update their bank account information. Future iterations could allow for changes of address, income, child custody and family size, including new babies whose parents would be eligible for the payment. The IRS plans to provide more detailed information and questions and answers soon. The White House has made more information available at www.childtaxcredit.gov.
What happens to the credit after 2021?
If Congress does nothing, the monthly payments go away and the credit returns to $2,000 per child under 17. President Biden wants to extend the current credit through 2025. Many congressional Democrats want to make it permanent.