What to know about tax credits

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 Economic Impact Payments that they may have missed.

The first two tranches – up to $ 1,200 and $ 600, respectively – were technically advance payments for the 2020 Recovery Credit.

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

This may have happened if the IRS did not have a recent tax return, for example. Registered income can disqualify check families, which are not available to people with higher incomes.

Say someone lost income in 2020 and now qualifies for checks for $ 1,200 and $ 600. The IRS may not have issued payments to that person because the agency had a 2019 income tax return reporting a higher income.

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

They must file a 2020 income tax return, even if they do not normally do so.

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

Generally, those with an adjusted gross income of up to $ 75,000 for singles, $ 112,500 for breadwinners and $ 150,000 for couples filing jointly are eligible for full payment. Checks are phased out above these limits.

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

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

The poorest 20% will have an average federal tax cut of $ 3,270, she said.

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

The American Rescue Plan increases that amount to $ 3,600 for children under 6 and $ 3,000 for older children. The legislation also expands the qualifying age of children to allow credit for 17-year-olds.

The total tax reduction would be available to individuals who earn up to $ 75,000 per year, heads of households who earn up to $ 125,000 and couples who file a joint tax return who earn up to $ 150,000. Credit is phased out for those who earn more.

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

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

This structure has largely benefited wealthy families. A lower income earner with no tax obligations could receive only $ 1,400 back, while the highest income earner could generally claim a higher amount.

About 19% of taxpayers qualified for credit had very low incomes to get the most, according to the Congressional Research Service.

“It is a big change in the way we are distributing to low-income families,” said Garrett Watson, a senior policy analyst at the Tax Foundation, of the changes in credit.

The changes will be applied during next year’s tax season, when families submit their 2021 statements.

In addition, lawmakers are trying to turn credit into a predictable income stream through prepayments starting in July this year.

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

The advance would be half the amount of a family’s credit; the other half would be returned at the time of tax next year. People who make a 2020 return will be eligible for prepayment.

Payments should be monthly, but can be quarterly, depending on what the IRS is able to manage, experts said.

Monthly payments can reach $ 300 per child, said Watson.

“It is very similar to stimulus checks, advancing a payment based on this year’s tax return,” said Watson.

There is a caveat: families can return the money if they receive an advance more than they are entitled to – which may be due to changes in income, the status of the process or the number of children. However, there are some protections for those who earn less.

Advance payments are estimates based on 2020 income tax data (or 2019 if unavailable). Families will be able to update this information on an IRS web portal later this year.

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

Credit changes will largely go to childless workers, experts say. Its maximum benefit has been tripled, from $ 543 to about $ 1,502, according to the Tax Foundation.

This is a function of increasing the income level at which taxpayers can obtain the maximum credit and at which the maximum credit begins to become extinct. (These levels are now $ 9,820 and $ 11,610, respectively, for non-joint filers.)

The minimum age to complain has been reduced from 25 to 19 years old. The upper limit (previously up to 65 years old) has been eliminated.

Even with the changes, most of the credit benefits (about 85%) should go to families with children, said Maag. However, this fell by around 97%.

About 9% of taxpayers will get a tax cut due to the changes, almost all of them among the poorest 20%, said Maag. The average tax cut is projected at around $ 700.

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

He increased the amount of expenses paid eligible for credit to $ 8,000 for a child or dependent and $ 16,000 for two or more. (This is over $ 3,000 and $ 6,000, respectively.)

The law also allows families to cancel 50% of these expenses instead of 35%.

This means that taxpayers can get a maximum credit of $ 4,000 for a child or dependent and $ 8,000 for two or more. (This is over $ 1,050 and $ 2,100, respectively.)

The law also made the credit fully refundable.

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

And the benefits affect the upper middle class, she said, since low-income families tend to rely on informal care and do not incur childcare expenses.

Credit starts to decline when revenue reaches $ 400,000.