Quietly tucked into the $1.9 trillion stimulus bill that Congress passed on Wednesday is a giant expansion of child and childcare tax credits, to which parents everywhere are saying Hallelujah! and About #*$@ing time and Wait, America no longer expects me to come up with a quarter-million per kid? Really?
The program is a huge increase over the long-standing U.S. tax credits for children and—pivotally—makes the credits fully available to both low-income households and households that might owe less in taxes than the credit amounts.
The bill is now heading for President Joe Biden’s desk. He’s expected to sign it Friday. Here’s what parents can expect:
How much money are we talking?
Let’s first wrap our heads around what’s happening here. There are two separate pots of money with annoyingly similar names:
- the child tax credit
- the child and dependent care credit
What’s happening with the child tax credit?
Expect $250 per month for children 6-17 and $300 per month for children 0-6. The average American family has 1.9 children, so most families will see a check of at least $500-$600 per month.
How will this money appear?
Likely as a monthly check or deposit—the Treasury can decide exactly how to mete it out. This is a big change from the old child tax credit, which appeared as an annual credit on taxes, and thus was not actually “felt” by most parents.
When is this great windfall coming?
As early as summer. Once Biden signs the bill into law, the Treasury needs to set up the program.
We’re already well into 2021, so how will the timing work, exactly?
Families will eventually receive the full 2021 amount. The Treasury will likely start monthly payments around July, and then parents can claim the missing January-June credits on their 2021 tax returns. (Note: These timelines may change as the details are finalized.)
Which parents won’t get the credit?
The credit begins to phase out for individuals with adjusted gross incomes above $75,000 per year (falling to zero above $95,000), heads of households with incomes above $112,500 (with a maximum of $132,500), and couples earning $150,000 (with a top limit of $170,000). More precisely, the credit is lowered by $50 for each additional $1,000 of income.
So higher-earning parents just don’t get a credit?
It’s confusing. Individuals earning up to $200,000 and couples earning up to $400,000 can claim the old $2,000-per-child credit, which is approximately on par with the last couple years of child tax credits. This breaks down to roughly $166 per month per kiddo.
What was the old child tax credit?
In 2017, the credit was only $1,000 per kid, and the phase-out threshold was much lower, at $75,000 for singles and $110,000 for couples. For the last couple of years, parents received $2,000 per kid, with a higher-income phase-out ($200,000 for individuals and $400,000 for couples). It previously did not apply to 17-year-olds—who are hella expensive (see: car insurance).
What’s up with the child and dependent care credit?
Good things! Parents will get a credit for 20-50% on expenses of up to $8,000 per child or $16,000 for two. Translation: Households earning up to $125,000 will get the full 50% credit of $4,000 for one kid or $8,000 for two or more kids. The percentage phases down (from 50% to 20%) for families earning $125,00-$400,000), and then lowers 1% for each $2,000 earned over that. It applies to kids up to age 13.
Why is no one talking about this?
The language of the bill is mind-bogglingly confusing. (These credits are written as a freestanding list of edits to previous legislative language. So reading the bill itself does not explain the credits.)
What was the old child and dependent care credit?
Tiny. It maxed out at $1,050 for one kid and $2,100 for two or more, with quite low income phase-outs, so most middle-class parents weren’t getting those amounts.
Anything else to know about?
For 2021, you can put up to $10,500 into a dependent-care FSA (flexible spending account)—but employers have to allow it. This essentially makes childcare spending tax-free up to $10,500.
Should I do anything if my 2019 or 2020 income qualifies me for a larger tax credit?
Consider not taking tax advice from an online article. But yes, talk to your accountant—the IRS will use your most recent adjusted gross income (2019 or 2020), so strategize the timing of your 2020 filing accordingly.
Are these credits forever?
For now, the credit is just for 2021 and will require separate legislation to continue. Democrats have made clear that they intend for it to stay around.