What to know about tax credits


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Recovery Refund Credit

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The recent round of relief included stimulus checks of up to $ 1,400 per person.

But it also allows people to claim previous rounds of Financial Impact Payments that they may have missed.

The first two tranches, up to $ 1,200 and $ 600, respectively, were technically advances of the 2020 Recovery Refund Credit.

Taxpayers who received the full amount of the check are not eligible to receive additional money. But some may qualify for more help if they did not receive a first or second round of payments, or received less than the full amounts.

That may have happened if the IRS did not have a recent tax return, for example. Recorded income can disqualify households from checks, which are not available to people with higher incomes.

Let’s say someone lost income in 2020 and now qualify for checks of $ 1,200 and $ 600. The IRS may not have issued payments to this person because the agency had a 2019 tax return that reported higher income.

That person can claim a Recovery Refund Credit for payment during this year’s tax season. It will come in the form of a tax refund.

They must file a 2020 tax return even if they don’t usually file a return.

The same rules will apply regarding recent checks for $ 1,400 when Americans file their taxes in 2022.

Generally, those with adjusted gross income up to $ 75,000 for singles, $ 112,500 for heads of household, and $ 150,000 for married couples filing jointly are eligible for full payments. Controls are phased out above those limits.

Child tax credit

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The American Rescue Plan made several changes to the child tax credit, both in amount and time.

About 80% of families with children will get a tax cut due to the new rules, with huge benefits for low-income people, according to Elaine Maag, a senior associate researcher at the Urban-Brookings Center for Fiscal Policy who studies the programs. income support.

The bottom 20% will get an average federal tax cut of $ 3,270, he said.

Under the rules above, taxpayers could claim a child tax credit of up to $ 2,000 per child under the age of 17.

The American Rescue Plan raises it to $ 3,600 for children under 6 and $ 3,000 for older children. The legislation also extends the age of qualifying children to allow a 17-year-old credit.

It’s a big change in the way we distribute to low-income households.

Garrett watson

Senior Policy Analyst at the Tax Foundation

The full tax exemption would be available to individuals earning up to $ 75,000 a year, heads of household earning up to $ 125,000, and married couples filing joint tax returns earning up to $ 150,000. Credit is phased out for people with higher incomes.

Higher-income families will generally get the same benefit as under the previous law (unless they have an eligible 17-year-old child, in which case they would get more), according to the Congressional Research Service.

The relief measure also makes the child tax credit fully refundable. It had been partially refundable – taxpayers could only get back up to $ 1,400.

That structure greatly benefited wealthy families. A low-income person with no tax liability could only recover up to $ 1,400, while higher-income people could generally claim a higher value.

About 19% of taxpayers eligible for the credit had incomes too low to get the maximum, according to the Congressional Research Service.

“It’s a big change in the way we distribute to low-income households,” Garrett Watson, senior policy analyst at the Tax Foundation, said of the changes in credit.

The changes would apply during next year’s tax season when families file their 2021 returns.

Additionally, lawmakers are trying to turn credit into a predictable income stream through advance payments starting in July this year.

This would help low-income people smooth out any volatility in their income, perhaps if they work seasonal or part-time jobs, and better manage their monthly bills, Maag said.

The advance would correspond to half the value of the family loan; the other half will be reimbursed at tax time next year. Individuals filing a 2020 return will be eligible for prepayment.

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Payments are expected to be monthly, but can ultimately be quarterly, depending on what the IRS can manage, experts said.

Monthly payments can be as high as $ 300 per child, Watson said.

“It’s a lot like stimulus checks, advancing a payment based on this year’s tax return,” Watson said.

There is one caveat: Families can owe money if they receive a larger advance than they are eligible for, as may occur due to changes in income, filing status, or number of children. However, there are some protections for people with lower incomes.

Advance payments are estimates based on 2020 income tax data (or 2019 if not available). Families will be able to update this information on an IRS web portal later this year.

Earned income tax credit

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The earned income tax credit is a refundable tax credit for low-income working families. Its amount depends on income and the number of children.

The changes in credit will go largely to childless workers, experts said. His maximum benefit tripled, to about $ 1,502 from $ 543, according to the Tax Foundation.

That is a function of raising the income level at which taxpayers can get the maximum credit and at which the maximum credit begins to be phased out. (Those levels are now $ 9,820 and $ 11,610, respectively, for non-joint taxpayers.)

The minimum age to claim it was reduced from 25 to 19 years. The upper age limit (previously up to 65 years) was removed.

Even with the changes, most of the credit benefits (about 85%) are expected to go to families with children, Maag said. However, that is less than about 97%.

About 9% of taxpayers will get a tax cut due to the changes, nearly all in the bottom 20% of earners, Maag said. The average tax cut is projected to be around $ 700.

Child and dependent care credit

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The American Rescue Plan allows taxpayers to offset a greater portion of the costs associated with caring for children and dependents.

Increased the amount of paid expenses eligible for a credit to $ 8,000 for one child or dependent and $ 16,000 for two or more. (That’s more than $ 3,000 and $ 6,000, respectively.)

The law also allows households to pay 50% of those expenses instead of 35%.

That means taxpayers can get a maximum credit of $ 4,000 for one child or dependent and $ 8,000 for two or more. (That’s an increase of $ 1,050 and $ 2,100, respectively.)

The law also made the credit fully refundable.

However, not many taxpayers will benefit. About 13% of all families with children will get a tax cut, Maag said.

And the benefits are skewed toward the upper middle class, he said, as low-income families tend to rely on informal care and incur no childcare expenses.

Credit begins to be eliminated once income reaches $ 400,000.

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