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Democrats Propose Dramatic Expansion Of The Child Tax Credit

This article is more than 3 years old.

Turn down the lights. Turn up the Marvin Gaye. It’s baby-making time.

Look, I get it. You’re not accustomed to reading an article about the intricacies of the tax law and walking away ready to throw down. But this time is different.

This week, the House of Representatives will vote on the latest round of COVID relief, and should it pass both chambers and be signed into law, there will suddenly become a MUCH bigger tax break for adding a member to the family. But there’s a catch: this new incentive will only be in place for 2021, which according to my calendar, has only ten months remaining. And since it takes a full nine months to go from copulation to childbirth, time is of the essence.

To understand what’s at stake, let’s take a look at the current construction of one of the primary tax benefits of having a kid – the child tax credit (CTC). Then, we’ll layer on how the credit will change for 2021 if the American Rescue Plan – President Biden’s $1.9 trillion stimulus package – becomes law.

Current Child Tax Credit Rules

The CTC has been around since 1997, and its purpose is clear: Congress recognizes that taxpayers with children have to pay for necessities like food, clothing, and Nintendo Switch V-Bucks, leaving less cash lying around to satisfy their annual income tax bill. As a result, as the law stands today, taxpayers may claim a CTC of up to $2,000 for each child who hasn’t turned 17 by the end of the year. As a reminder, a credit results in a dollar-for-dollar reduction in your tax liability.

Example. H&W have two children, ages 2 and 5. H&W have a tax liability of $10,000 before credits. After reduction for the $2,000 CTC that H&W can claim for each child, their final tax liability will be $6,000.

But what if H&W’s tax bill is only $1,000 before the $4,000 credit? After 2017, up to $1,400 of the $2,000 CTC is now refundable. The refundable portion is generally capped at 15% of the excess of earned income over $2,500.

Example. H&W have total earned income of $27,500, a tax liability of $1,000 before credits, and two children resulting in a CTC of $4,000 for 2020. The credits work like so:

  • The $4,000 CTC reduces H&W’s tax liability from $1,000 to $0, then
  • H&W would receive a refund equal to the lesser of:

The maximum refundable portion of the remaining credit, or $2,400, or

 15% of the excess of earned income ($27,500) over $2,500, or $3,750.

  • Thus, H&W would receive a refund of $2,400.

To prevent higher-income taxpayers from claiming the credit, the CTC disappears as adjusted gross income (AGI) increases. AGI is effectively your gross taxable income earned from all sources during the year reduced by a few select deductions. For a married couple, the credit starts to phase out once AGI exceeds $400,000, and it’s completely gone by the time AGI reaches $440,000 for parents with one qualifying child and $480,000 for parents with two qualifying children. The phase-out of the credit begins at $200,000 for single parents and ends at $240,000 for one child and $280,000 for two children.  

Proposed Child Tax Rules

There are actually three different CTC expansion proposals floating around Capitol Hill at the moment — including one led by Republican Senator Mitt Romney — but we’ll focus on the provision that is the subject of this week’s House vote.

For 2021 only, the bill would make several significant enhancements to the credit. We’ll take them one-by-one.

Older Children Permitted

In a simple change, taxpayers will be entitled to a credit for a child that hasn’t reached the age of 18, rather than 17, by the end of the year.

Increased Credit Amount

The bill would then expand the credit from $2,000 to $3,000 for most qualifying children, but the credit would rise all the way to $3,600 for a child who hasn’t reached the age of 6 by the end of the year.

Increase in Refundable Amount

There would be no more complicated calculation to determine the refundable amount of the CTC. The entire credit of $3,000 – or $3,600, if applicable — would be refundable.

Let’s pause for a moment and revisit our example from earlier:

Example. H&W have total earned income of $27,500, a tax liability of $1,000 before credits, and two children under the age of 6, resulting in a CTC of $4,000 and refund of $2,400 for 2020. If the bill become law as written, in 2021 the refund would rise to $6,200 (a total credit of $7,200, reduced by the $1,000 tax liability). That’s an extra $3,800 for H&W, or an amount that exceeds the total stimulus payments received by most Americans during 2020.

It’s not all good news, for parents, however…

Changes to the Phase-Out Limits

Under the 2021 regime, there will actually be two separate limitations on the credit. The excess credit available for 2021 only — $1,000 for a child over the age of 6 and $1,600 for a child below that age) will begin to disappear beginning at AGI of $150,000 for a married couple (compare to $400,000 under current law) and $112,500 for a head of household (compare to $200,000) and $75,000 for a single parent (compare to $200,000).

Because President Biden has promised, however, not to increase taxes on taxpayers earning less than $400,000, the “normal” CTC of $2,000 will continue to phase out at the higher limitations in place under current law.

Advance Payment of the Credit

Here’s where things get interesting. The bill would endeavor to make the CTC payable in ADVANCE during 2021. If the bill becomes law, taxpayers would receive checks from July through December of 2021 from the IRS based on the anticipated credit amount. This would significantly accelerate cash flow for a family with children, who would normally have to wait until the filing of the 2021 return — sometime in early 2022 — to claim the credit. Of course, as fellow Forbes writer Howard Gleckman points out, expecting the IRS to administer payments on this scale is not without risk.

The bill has to first become law, but considering the Democrats are employing the budget reconciliation process to make it happen — meaning no votes from Republicans are necessary — as long as all 50 Democratic Senators are on board, there’s nothing that can stop the enhanced credit from becoming a reality. That doesn’t mean some tweaks aren’t possible along the way, but it appears the party is generally unified in its approach to the CTC.

So while I understand that there’s a certain appeal to wrapping up a night by watching a couple of episodes of Always Sunny and passing out on the couch, you have to consider the math. If you produce a newborn before the end of 2021, the government will pay you up to $3,600 for the effort, which based on my experience, comes to approximately $1,800 per minute. That’s good work if you can get it.

MORE FROM FORBESAdvancing Child Tax Credit Payments Makes Good Sense, But The IRS Will Need Funds To Pull It Off
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