It’s that time of year when we are thinking about getting our income taxes filed, so hopefully we can get a refund. As Congress discusses the American Rescue Plan, the name for the new economic stimulus legislation, watch for the change in income tax credits for children.
Reworking the income tax credit available for families with children could lift about ten million children out of poverty in America. Economists are predicting that this may lead to a 40% reduction in the child poverty rate.
Presently, the child tax credit is worth $2,000 per dependent under the age of 17. The new stimulus package increases the credit next year to $3,000 per child, $3,600 for a child under age 6, makes the tax credit fully refundable, and allows 17-year-old children to qualify.
A credit means that the total income tax owed is reduced by that amount, even if it means receiving a refund. A deduction means that income is reduced, so less tax is owed.
When we file our income taxes each year, we are asked to list any children living in our household. A family receives a credit of up to $2,000 per year for each child under age 17. Other dependents, including children ages 17-18 and full-time college students ages 19-24, can receive a credit of up to $500 each. This is deducted from the total tax owed.
For low-income families, however, this tax credit may not be equal to $2,000 per child. Instead, the credit is based on the amount earned, and the credit is 15¢ per dollar after earning $2,500 (on which the credit is nothing). If the total of the child tax credit a family receives is greater than the amount they owe in taxes, they do not receive the full child tax credit.
The American Rescue Plan would temporarily expand the child tax credit for 2021. The tax break would begin to phase out at Adjusted Gross Incomes of $75,000 on single returns, $112,500 on head-of-household returns and $150,000 on joint returns. First, the plan would allow 17-year-old children to qualify. Second, it would increase the credit to $3,000 per child, $3,600 per child under age 6, for many families. Third, it would remove the $2,500 earnings floor. Fourth, it would make the credit fully refundable.
Fifth, the plan calls for the IRS to make a direct deposit or send out a check periodically from July through December to families. These periodic payments would account for half of the family’s 2021 child tax credit. For example, if monthly payments were made, this would result in payments of up to $250 per child ($300 per child under age 6) for six months. The family would then claim the remainder of the child tax credit when they file their 2021 return next year.
There are other tax credits and deductions a family with children may be eligible for. The Child and Dependent Care Tax Credit lets a family deduct day care expenses for children up to age 13 and for a dependent age 13 or over, if physically or mentally incapable of caring for themselves. The Adoption Tax Credit allows a family to deduct their adoption costs. The American Opportunity Tax Credit (AOTC) is for qualified education expenses paid for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. The Lifetime Learning Credit of up to $2,000 per year is available for post-secondary education as well as for adult and continuing education courses after the AOTC has run out. There is no limit on how many years you can claim the credit.
According to the USDA, the average cost of raising a child from birth to age 17 is $233,610 in a married two-parent middle income family with two children. Rural areas like our have a slightly lower cost, $193,020 to raise a child to age 17. The cost ranges from $12,000-$14,000 a year based on the child’s age.
With the Biden Administration and Congress, there will be a focus on reducing the poverty rate in America, where almost 10% of our citizens live in poverty. The rate for children, however, is 16%! The change in the Child Tax Credit will be one of many proposals to assist families with the costs of raising children, and one of many ways the government will be assisting those who live in poverty.