Image shows two children playing at a small table.

It’s hard to believe we’ve now lived through more than a year of the COVID-19 pandemic. As the vaccine rollout brings a new sense of hope to the country, many families still struggle with the financial implications of the past 12 months. Fortunately, another beacon of relief is on the horizon: The $1.9 trillion American Rescue Plan Act of 2021, which includes a third round of stimulus checks for qualified recipients, as well as an expanded child tax credit for 2021. This seemingly small line item in the 630-page document could have an outsized impact on more than 69 million children and their families.

 What is the expanded child tax credit?

With Congress passing the third Coronavirus stimulus package, the child tax credit is increasing from $2,000 to $3,000 per child 17 and under (or $3,600 for kids under age six) for the 2021 tax year. But this isn’t the only change that can make a big difference. The expansion will also …

  • Temporarily allow 17-year-old children to qualify for the credit
  • Remove the requirement that households must earn at least $2,500 to receive the credit
  • Make the credit fully refundable (meaning families can receive the full credit even if their tax liability is zero)
  • Allow families to receive up to half the credit through monthly payments from July to December 2021 (the remaining amount would then be claimed on your 2021 tax return)

 

Who qualifies? And how much child tax credit will you receive?

This expansion is income-based and will reflect the adjusted gross income (AGI) on your most recently filed tax return — either 2020 or 2019 if you haven’t yet filed this year. It will begin to phase out for individuals who earn $75,000 or more annually, $112,500 for heads-of-households, and $150,000 for married couples filing jointly. The maximum families can receive is $3,600 for children below age six and $3,000 for kids six through 17 years old.

For each additional $1,000 of AGI, the credit is reduced by $50 per child. So, individuals who earn $95,000 and couples earning $170,000 will not be eligible for the expanded relief.

Still, families that have an AGI of $200,000 (or $400,000 if filing jointly) can qualify for the standard child tax credit of $2,000 per child.

2021 Child Tax Credit Calculation

To find out if and how much of the credit you may receive, try our step-by-step guide.

Image shows a visual depiction of how to calculate the amount of child tax credit a person could receive based on the ages of their children and their AGI. If single and making $75,000.00 AGI or less, head of household making $112,500.00 AGI or less, or married filing jointly and making $150,000.00 AGI or less -- families can receive is $3,600 for children below age six and $3,000 for kids six through 17 years old. For each additional $1,000 of AGI, the credit is reduced by $50 per child.

For additional information on the child tax credit, visit the IRS website.

The Effects on Families and Communities of Color.

Because the pandemic forced millions out of the workforce, school closures made some parents choose between working or educating their children, and lack of childcare made working at home nearly impossible for others, many families with kids have struggled to stay afloat.  The expanded child tax credits will provide much-needed aid to families in all kinds of difficult, financially strenuous circumstances.

This portion of the COVID-19 relief package provides financial assistance for the families of more than 93% of children across the country. But more notably, it will reach the lowest-income families that have not previously qualified for the credit due to being below the income floor. To put it in perspective: Currently about 27 million children — including about half of all Black and Brown children — do not qualify for the maximum $2,000 per child tax credit because their parents don’t earn enough, while kids from higher-income families are eligible for the full credit.

The expanded credit could have a historical impact on reducing child poverty, which disproportionally affects children of color. By providing $300 monthly for each kid under six and $250 for those six and up, the United States could cut child poverty by 45% — and more than 50% for Black families.

For parents who have lost their jobs, those who’ve had to significantly cut down on work in order to care for their children over the last year, and essential workers who earn low wages or have unstable incomes, the expanded child tax credit will provide critical relief during an extremely challenging time. More than one-third of recipients plan to use the extra funds to purchase household necessities, while at least a quarter will use some of the money to pay for childcare and school related expenses, and towards household debt or bills. About 20% of those receiving the child tax credit will use some of it to pay mortgage or rent. And more than half of recipients plan to save a portion for the future.

The positive effects of these funds won’t be limited to just the immediate relief they provide. Not only does reducing childhood poverty today mean those kids have a greater chance of graduating high school, going to college, and staying away from harmful substances, but a $3,000 increase in annual family income for a child under five can result in approximately 19% greater income in adulthood.

Parents, breathe a sigh of relief

These days, parents are often the unsung heroes. Juggling work, distanced learning, grocery shopping, bedtime, and more can feel like a nearly impossible task, especially when financial troubles are present (and exacerbated by the pandemic). But with the passage of the American Rescue Plan and its expanded child tax credits, a small yet impactful wave of relief is on the way to make navigating the next few months a smidge more manageable.

Families, we’re here to help you make the most of every dollar. Explore our Online Savings Account.

*This article is not meant to deliver tax advice. Please consult with a tax professional for guidance and questions.