Tax rule changes in recently-passed Congressional bills in response to the pandemic are head-spinning. Overall, these changes provide targeted financial support and tax relief for people who have suffered financial hardship because of COVID-19. The IRS just came out with guidance on one of these changes, an enhanced Child Tax Credit. Temporary changes to the Child Tax Credit are intended to provide relief to taxpayers with eligible dependent children and bridge the financial gap until the American economy recovers.
The enhanced Child Tax Credit is part of the $1.9 trillion American Rescue Plan that President Joe Biden signed into law in March 2021. Formally called Child Tax Credit Improvements for 2021, families need to know about its valuable provisions:
- Child Tax Credit increases are in effect for 2021 only.
- The Child Tax Credit is increased from $2,000 to $3,000 per eligible child, for children who are age 6 and older.
- For children under the age of 6, the Child Tax Credit is increased to $3,600 per eligible child.
- The age for qualifying children has also been increased from children under age 17 to children under age 18. This change allows more children to be considered eligible for the Child Tax Credit.
- The Child Tax Credit is fully refundable, meaning that eligible taxpayers could receive a tax refund that exceeds her or his tax federal withholding.
- Income limitations for the Child Tax Credit remain at $200,000 for single taxpayers and $400,000 for married filing joint. The income limitation for the Additional Child Tax Credit is phased out by $50 for every $1,000 of modified adjusted gross income more than the threshold (e.g., $150,000 married filing joint).
- Advance payments of one-half of the eligible Child Tax Credit will be issued in equal periodic payments from July to December 2021. Any eligible Child Tax Credit not paid in advance will be received when the taxpayer files her or his 2021 income tax return.
Guidance on the new tax rules for the enhanced Child Tax Credit is fresh off the presses. The IRS plans to post more information on its website (www.irs.gov), along with a portal for taxpayers to change personal information that may impact the amount of the advance payments, like the birth of a child or a change in which separated or divorced parent claims the child as an eligible dependent.
These enhancements to the Child Tax Credit for 2021 are temporary. Knowing the valuable rule changes can help to bridge the financial gap for many American families.