I hope you have managed to stay safe and well! We focus on resolving tax issues in Prince William County and throughout the lower Northern Virginia area.

As you know by now, On March 11, 2021, President Biden signed into law H.R. 1319 – the American Rescue Plan Act (from here forward referred to as the “Act”), Part of the Act contains many different funding and support programs. One of which involves the increase in the Child Tax Credit, Child Care Credit, and Earned Income Tax Credit. What we know thus far is described below:

Increased Child Tax Credit and Earned Income Tax Credit

The new Child Tax Credit is currently for 2021 only.  For families that qualify, it will be a $3,600 credit for each child under age 6. For children ages 6 to 17, the credit is $3,000. The big difference from previous years, is that half of the credit will be paid out monthly from July through December. For me this is the real potential change in the social “safety net” fabric of America. Essentially, the IRS will deposit the Child Tax Credit into taxpayers’ bank accounts – ($300 for each child under age 6 and $250 for each child ages 6 to 17).

The remaining half of the credit will then be an adjustment on the taxpayers’ 2021 income tax return, to be filed by April 15, 2022, but be subject to income limitations. For single taxpayers, that is an Adjusted Gross Income (AGI) of $75,000 or less. For head of household, that is an AGI of $112,500 or less. Finally, for those filing married filing joint, it is an AGI of $150,000 or less.

But keep in mind that the credit is subject to a phase out. That means for every $1,000 a taxpayer earns over the AGI limit, their credit will be reduced by $50. For instance, if the taxpayer is a single filer with an AGI of $85,000, their credit will be reduced by $500 per child. . Phase-out limits begin at $75,000 in income for single filers and $150,000 for married filing jointly. The Child Tax Credit is fully refundable for 2021, and children remain eligible through age 17 (previously, 16).

How do you qualify for the new Child Tax Credit? The new Child Tax Credit is a 2021 tax credit, which means it will be based on your 2021 income. However, in order to quickly begin providing relief to taxpayers, the IRS will look at your 2020 income tax, as they did with the stimulus programs. If the taxpayer has not yet filed for 2020, they will look back to the 2019 return. As this is an AGI-based program, if a taxpayer’s 2020 income is within the AGI to qualify, but their 2021 income exceeds the limitations and phase out, the taxpayer will need to pay back the credit on their 2021 tax return.

We tax professionals are still sifting through the new law to find more information that can help taxpayers save money on taxes within The Act.  So stay tuned for forthcoming information, and if you’re unsure about your tax situation this upcoming tax season, we would be happy to help. Please feel free to contact us