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Families with children – especially low-income people – are ready to get a bigger tax deduction next year.
The $ 1.9 billion U.S. bailout plan, which President Joe Biden hopes to sign Friday, makes some major changes to the child tax credit.
These adjustments to the tax code include increasing the credit value, making it available to families with older children and repaying it. The funds come in a regular income stream later this year as opposed to a lump sum at tax time.
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According to the Urban-Brookings Tax Policy Center, Americans would receive an average tax cut of $ 2,700 as a result of the legislative changes.
The bottom fifth of earners (Americans earning less than $ 25,500 a year) will get the biggest bump, according to the analysis – an average of $ 3,800. Ninety percent of the lowest earners will get a break.
By comparison, about 39% of affluent families will see a benefit. According to the Tax Policy Center, the best 20% will receive an average tax cut of $ 600.
The relief measure’s changes are temporary. From now on, they would only be in place for a year.
Here’s what you need to know about extended credit.
Amount and age
A tax credit reduces the total tax bill.
At present, taxpayers can claim a child tax credit of up to $ 2,000 per child under 17.
The U.S. rescue plan increases it to $ 3,600 for children under 6, and up to $ 3,000 for older children.
According to the Tax Policy Center, about 3 out of 4 families with children will receive a larger tax credit than under current legislation.
The legislation also extends the age of qualifying children by one year. It also allows families to claim credit for 17-year-olds.
The child tax credit is limited.
The full tax break would be available to individuals earning up to $ 75,000 a year; household heads earning up to $ 125,000; and married couples filing a joint tax return up to $ 150,000.
The credit phase is being phased out for higher earners.
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The mitigation measure also makes the tax break fully refundable.
There are two types of tax credits: refundable and non-refundable.
The child tax credit is a repayable credit. Taxpayers get a refund even if the credit exceeds the total tax bill. In other words, the refund is not just a tax liability; it also allows people to put the extra in the pocket.
At present, the child tax credit is partially refundable. Taxpayers can only get back up to $ 1,400 total.
Wealthy families, who usually have larger tax bills, benefit most from this structure. They can usually claim the full value of the credit, while someone with no tax liability has a $ 1,400 benefit.
A single parent with one child must earn at least $ 25,000 a year to currently receive the full $ 2,000 credit, said Elaine Maag, a lead research fellow at the Tax Policy Center, who studies income support programs.
About 27 million children live in households that do not get the full value of the credit because the parents’ income is not high enough.
The US rescue plan makes the tax credit for children fully repayable, which means that low earners will get more money back.
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At present, the credit is available to taxpayers in a lump sum when they file taxes (if they are refunded).
The pandemic aid measure would make the credit a regular income stream for families.
According to the legislation, the periodic payments can start as early as July. Their frequency is unclear, but it could be monthly or quarterly, Maag said.
The timeline depends on how quickly the IRS can reprogram its systems to accommodate the adjustment.
“A sustained payment to individuals and families is very different from the way the IRS usually works,” Maag said.
The revenue would technically be an advance on Americans’ expected credit for the 2021 tax season. They get half the credit this year on periodic payments, and the rest during the tax season next year.
The legislation requires the IRS to create an online portal that allows taxpayers to withdraw regular payments. With the portal, they can also change information such as the size of the family.