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What to know about tax credits in the American Rescue Plan

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Recovery rebate credit

Child tax credit

The American Rescue Plan made several changes to the child tax credit, both in amount and timing.

About 80% of families with kids will get a tax cut due to the new rules, with outsized benefits for lower earners, according to Elaine Maag, a principal research associate at the Urban-Brookings Tax Policy Center who studies income support programs.

The bottom 20% will get an average federal tax cut of $3,270, she said.

Under prior rules, taxpayers could claim a child tax credit of up to $2,000 per kid under age 17.

The American Rescue Plan raises that to $3,600 for kids under age 6, and to $3,000 for older children. The legislation also expands the age of qualifying children to allow a credit for 17-year-olds.

It’s a big shift in the way we’re distributing to low-income households.

Garrett Watson

senior policy analyst at the Tax Foundation

The full tax break would be available to individuals who earn up to $75,000 a year, heads of household who earn up to $125,000 and married couples filing a joint tax return who earn up to $150,000. The credit phases out for higher earners.

Higher-income families will generally get the same benefit as under prior law (unless they have an eligible 17-year-old, in which case they’d get more), according to the Congressional Research Service.

The relief measure also makes the child tax credit fully refundable. It had been partially refundable — taxpayers could only get back up to $1,400.

That structure largely benefited wealthy families. A lower earner with no tax liability could only get up to $1,400 back, while higher earners could generally claim a higher value.

About 19% of taxpayers eligible for the credit had incomes too low to get the maximum, according to the Congressional Research Service.

“It’s a big shift in the way we’re distributing to low-income households,” Garrett Watson, a senior policy analyst at the Tax Foundation, said of changes to the credit.

The changes would apply during next year’s tax season when families file their 2021 returns.

In addition, lawmakers are trying to turn the credit into a predictable income stream via advance payments starting as early as July this year.

This would help low earners smooth any volatility in their earnings, perhaps if they work seasonal or part-time jobs, and better manage their monthly bills, Maag said.

The advance would be on half the value of a family’s credit; the other half would be refunded at tax time next year. People who file a 2020 return will be eligible for the advance payment.

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Payments are expected to be monthly but may ultimately be quarterly, depending on what the IRS is able to administer, experts said.

Monthly payments may be as high as $300 per child, Watson said.

“It’s much like the stimulus checks, advancing a payment based on this year’s tax return,” Watson said.

There’s a caveat: Families may owe money back if they receive a larger advance than they’re eligible for — as may occur due to changes in income, filing status or number of children. There are some protections for lower earners, however.

Advance payments are estimates based on 2020 income-tax data (or 2019 if unavailable). Families will be able to update this information on an IRS web portal later this year.

Earned income tax credit

Child and dependent care credit

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