Will the Expanded Child Tax Credit Help Families? Everything You Need to Know

Last Updated on July 9, 2021

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If you’re raising kids, the child tax credit, which was expanded this year, should be of interest. The good news is automatic monthly payments are set to show up in your bank account this month. Thirty-nine million households will receive the payments.

President Biden’s American Families Plan, the $1.9 trillion stimulus package centered on Covid-19 emergency relief, was signed in March 2021. The administration has proposed keeping the expanded childcare credit through 2025, making it permanently refundable.

According to a study from the Center on Budget and Policy Priorities, about 90% of American kids will benefit directly from the expanded tax credit. Additionally, 4.1 million children could be lifted out of poverty.

Prior to the temporary child tax credit expansion, the credit was not fully refundable. Only $1,400 of the $2,000 intended for each child could be paid to a family if it exceeded their tax liability and eligible families had to wait to claim the credit until they filed their tax return.

What’s Going on With the Child Tax Credit Now?

Starting this summer, the maximum enhanced child tax credit for low- and moderate-income families with kids is $3,600 for children younger than age 6 and $3,000 for those 6 to 17. Part of the credit is the monthly payments: $300 per child younger than 6 and $250 for those 6 to 17, which begin July 15th.

The changes also include:

  • Increasing the credit from $2,000 to $3,600 for children 5 and younger.
  • Increasing the credit from $2,000 to $3,000 for kids 6-16 and extending the $3,000 credit to 17-year-olds.
  • Making the credit fully refundable for 2021 so families receive the full amount, even if they don’t have earned income or a tax liability, as most low-income households with children don’t.
  • The credit expansion will phase out for individuals with a modified adjusted gross income (MAGI) of more than $75,000, for families with single parent head of households making more than $112,500, and married couples with $150,000 or more in income.
How can the expanded child tax credit help?
If you’ve filed a 2019 or 2020 tax return, your credit will be based on information from your tax return and will either be directly deposited to your bank account or mailed to your address. Photo credit: Shutterstock.com

One thing to note is that if you do elect the advance child tax credit payments starting July 15, (you don’t need to take any action to receive them), you will lose that amount from your Child Tax Credit on your 2021 taxes. For example, accepting the advance payments for a child under 6 means you’d receive $300 monthly for six months. Then on your 2021 taxes, your applied child tax credit would be $1,800. (see IRS for more details.)

If you’ve filed a 2019 or 2020 tax return, your credit will be based on information from your tax return and will either be directly deposited to your bank account or mailed to your address.

If you’d rather receive the full tax refund when you file your taxes in 2022 instead of the monthly payments, you can opt-out of the monthly payments at the IRS child tax update site.

Most people eligible for the credit already received a letter from the IRS about your families’ credit and how much your monthly payments will total. Families that haven’t filed a tax return or given the IRS their information should use the non-filer sign-up tool at the IRS site.

The Expansion will Do More than Help Families Hit by Covid-19 Related Financial Set Backs

Experts say the changes aren’t just a Band-aid on financial deprivation caused by Covid-19 but are laying the groundwork to slash childhood poverty permanently. No one wants children to be lifted from poverty only to return to it after this year, or in 2025, the year the administration proposed the credit be extended.

Analysts say this single provision could reduce child poverty by 45% according to Columbia University’s Center on Poverty and Social Policy with particularly large reductions for Black, Hispanic, and Native American children.

The White House is hoping to extend the policy beyond the current year with bipartisan support.