Q: I heard that the government is going to start sending monthly payments to families with children. Is this really true?
A: Yes, it is true. With the recent passage of the American Rescue Act, Congress instructed the IRS to begin sending “advanced” child tax credits every month to qualifying parents. Similar to the three stimulus payments, most families with children will begin seeing automatic direct deposits into their checkbooks.
In the past, parents had to wait until they filed their taxes to claim their child tax credits. Starting in late July, they will now get this money in advance for the six months of 2021. The other half of the child tax credit will arrive in the normal way, by claiming the benefit on their tax return. If parents prefer to receive all of their child tax credits in one fell swoop at tax time, they will be able to opt-out of these monthly payments.
The American Rescue Act’s new child tax credit for 2021 was increased by $1,000 per child, moving up from $2,000 to $3,000 per child between the ages of 6 and 17 ($250 per month.) For children under the age of 6, the tax credit was boosted by $1,600 to a new level of $3,600 per year ($300 per month.)
These new monthly payments will feel significant for many households. For example, a qualifying family with three children will begin to receive $750 to $900 per month.
These enhanced child tax credits only go to those who earn under certain income thresholds. Married couples with adjusted gross income of less than $150,000 ($75,000 for single parents) will now get these enhanced amounts. The regular, lower child tax credit amount of $2,000 per child will still go to married couples with adjusted gross income of less than $400,000 ($200,000 for single parents.) The enhanced and regular child tax credit are subject to phaseouts above these income levels.
Importantly, the new child tax credit for 2021 was also made “fully refundable.” This means qualifying parents – and over 90% of parents qualify – will now get a tax credit for the full amount, even if they don’t pay any federal income taxes. Prior to the new law, the tax credit was reduced to $1,400 per child for non-taxpayers. Ironically, those most in need received $600 less per child because they didn’t earn enough.
According to some analyses, the switch to the enhanced, and now fully refundable, child tax credit will lift around four million children above the poverty line. An estimated six million additional children will be lifted closer to the poverty line. This equates to about one in seven children in the US.
The changes to the child tax credit only apply to tax year 2021. Without new legislation, most families with children will cease receiving these monthly payments starting in January 2022. With the looming kick-off of the midterm election cycle, we’ll be hearing a lot more about this issue.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com