Under the prior law, the child tax credit allowed qualifying families to reduce their income tax bills by up to $2,000 for each child through age 16. The new law signed by President Biden on Thursday increases the credit to $3,000 a child and makes parents of 17-year-olds newly eligible. The credit rises to $3,600 for children under the age of 6 as of the end of 2021.
For a qualifying family with one child, the previous credit would have cut a $5,000 tax bill to $3,000. Now, the credit will cut the tax bill to $2,000, and to $1,400 if the child is under age 6.
Who is eligible?
More than 90% of families with children under 18 will get some benefit from the new law, according to estimates by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.
To determine the size of the benefit, it is helpful to divide the credit into the pre-existing $2,000-a-child credit and the expanded credit that adds $1,000 for children ages 6-17 and $1,600 for children under age 6.
The expanded portion of the credit begins to scale down for individuals at $75,000 in adjusted gross income, single heads of household at $112,500 and for couples filing jointly at $150,000. It phases out at $50 for every $1,000 in additional income.
For a couple filing jointly with one child, that means the newly added portion of the credit would fully phase out at $170,000, and at $182,000 if the couple had a child under age 6, calculations by the Tax Foundation, a right-leaning tax-policy research group, show.
That family would still be able to claim the $2,000 credit, until it hit $400,000 in income, the Tax Foundation says. That portion of the credit would then start to phase out, disappearing at $440,000 in income.
For a single head of household with one child, the $1,000 expanded credit phases out at $132,500 in income, and at $144,500 if the filer has a child under age 6, the Tax Foundation says. The taxpayer could claim the old, $2,000 credit until reaching $200,000 in income, and the credit would disappear at $240,000 in income.
For families with more than one child, the credit phases out at higher income levels.
Is the child tax credit refundable?
The new tax credit is fully refundable, a substantial change in philosophy that some experts say will significantly help low-income families.
Under the prior law, parents earning $2,500 or less couldn’t claim the credit; and families that earned more, but not enough to pay income taxes, could receive no more than $1,400 as a refundable credit. In linking the credit to a parent’s earnings, the law was intended in part to encourage people to work.
About 27 million children in low-income families didn’t receive the full, $2,000 benefit available to higher-earning families, according to the left-leaning Center on Budget and Policy Priorities.
Under the new law, the credit is fully refundable, and so parents with little or no income will get the full credit.
principal research associate at the Tax Policy Center, said that this change, along with other elements of the new law, will cut the number of children living in poverty in half, to about five million children.
When will the payments begin?
In another substantial change, the law envisions that parents will be able to receive money regularly through the year, rather than in one payment when taxes are filed. The goal is for the Internal Revenue Service to make a monthly payment to qualifying families starting in July.
“Aspirationally, they are trying to deliver a monthly credit in July, but there’s some flexibility,’’ said Ms. Maag. “The IRS might decide they can’t start it that early. They might decide to make it a quarterly payment.’’ The IRS hasn’t yet provided details on the payment schedule.
One goal of switching to periodic payments is to ease the volatility in earnings of many low-income parents, who may hold seasonal jobs or who enter and leave the workforce for various reasons.
Taxpayers could opt out of receiving periodic payments and instead take the full credit on their annual returns, as under current law. Those choices may affect households’ typical patterns of receiving refunds.
What if I already filed my taxes?
Not to worry. The expanded tax credit applies to the current, 2021 tax year, for which taxes are due in April 2022.
Payments made under the tax credit this year would be applied against 2021 taxes, to be paid in 2022.
Will the expanded child tax credit remain after this year?
Current law expands the credit only for 2021. Democrats in Congress, who approved the legislation without Republican support, hope that the law will prove popular and that there will be pressure to extend it ahead of the 2022 elections.
Republicans have complained that the Democratic-backed, $1.9 trillion Covid-19 aid bill, which included the expanded child credit, is too expensive and includes items unrelated to the coronavirus pandemic. But some Republicans have proposed their own programs aimed at extending more aid to children, suggesting that there could be room for a bipartisan agreement on some form of extended tax credit.
—Richard Rubin contributed to this article.
Write to Aaron Zitner at Aaron.Zitner@dowjones.com
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