The child discount will receive 4 major changes

Families with children – especially those with a low income – are ready to get a bigger tax credit next year.

The US $ 1.9 trillion bailout plan, which President Joe Biden hopes to sign on Friday, makes some big changes to the tax credit for children.

Those changes to the tax code include increasing the value of the credit, making it available to families with older children, and making it fully refundable. The funds would enter a regular income stream later this year, as opposed to a lump sum at time of tax.

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According to the Urban-Brookings Tax Policy Center, Americans would receive an average of $ 2,700 in tax cuts as a result of the legislative changes.

The bottom fifth of earners (Americans earning less than $ 25,500 a year) would get the largest increase, according to the analysis – an increase of $ 3,800 on average. Ninety percent of the lowest earners would get a break.

In comparison, about 39% of wealthy families would see benefits. The top 20% would receive an average tax cut of $ 600, according to the Tax Policy Center.

The changes to the relief measure are temporary. From now on, they would only be in place for a year.

Here’s what you need to know about the extended credit.

A tax credit lowers a person’s total tax bill.

Currently, taxpayers can claim a child discount of up to $ 2,000 per child under the age of 17.

The American Rescue Plan raises that to $ 3,600 for children under six and to $ 3,000 for older children.

According to the Center for Tax Policy, about 3 in 4 families with children will receive a greater tax reduction than under current legislation.

The legislation also extends the age of eligible children by one year. It also allows families to claim a 17-year-old credit.

There are income limits to the child tax credit.

The full tax break would be available to individuals earning up to $ 75,000 per year; family heads earning up to $ 125,000; and married couples filing joint tax returns earning up to $ 150,000.

The credit expires for people with a higher income.

Due to the deduction measure, the tax benefit is also fully refundable.

There are two types of tax credits: refundable and non-refundable.

The child discount is a refundable discount. Taxpayers get a refund even if the credit exceeds their total tax bill. In other words, the refund not only lowers a person’s tax liability – it also allows people to pocket the extra.

The child discount is currently partially refundable. Taxpayers can only get back a total of $ 1,400.

Wealthy families, who typically have larger tax bills, benefit the most from this structure. They can generally claim the full value of the credit, while someone with no tax liability has a maximum of $ 1,400.

A single parent with one child must earn at least $ 25,000 a year to get the full $ 2,000 credit now, said Elaine Maag, a lead investigator at the Tax Policy Center who studies income support programs.

About 27 million children live in households that do not receive the full value of the credit because the parents’ income is not high enough, she said.

The American rescue plan makes the child discount fully refundable – meaning that people on low incomes get more money back.

Currently, the credit is available to taxpayers in a fixed amount when they file their tax return (if they get a refund).

The pandemic bailout would turn the credit into a regular income stream for families.

According to the legal text, the periodic payments can start to arrive as early as July. Their frequency is unclear, but they can 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 how the IRS typically works,” Maag said.

The income would technically be an advance of the Americans’ expected credit for the 2021 tax season. They would get half of that credit in periodic payments this year and the remainder during the tax season next year.

The legislation directs the IRS to create an online portal through which taxpayers can forgo regular payments. They could also change information such as family size through the portal.