How the New Child Tax Credit Works

The American Rescue Plan Act funds additional economic aid payments, faster vaccine distribution, mandates emergency paid leave for millions, extends additional unemployment benefits, and provides billions to struggling state and local governments, among other provisions. Perhaps most dramatically for parents, it also expands and transforms the child tax credit to make it a fully refundable, monthly cash payment that goes right into the hands of American parents of kids.

In other words, it’s a dramatic departure from the status quo for working- and middle-class parents. Here’s what you need to know.

How big is the new tax credit?

The tax credit is $3,600 for each kid under six years old and $3,000 for each kid aged six to 17. There is no known limit to the number of kids that can benefit from the package.

How will the money be disbursed?

Along with the bigger amounts, one of the biggest changes in this new tax credit is how it’s distributed. Parents will receive half of what they’re owed after they file their taxes and the other half through periodic payments if they elect to do so through an online IRS portal.

Widespread ongoing cash assistance is a huge deal, as it means parents don’t have to wait until tax time to receive the benefit they’re entitled to.

Which parents will receive the credit?

The payment amounts begin to diminish for single filers making $75,000 per year, heads of household making up to $112,500, and dual filers making up to $150,000, with no bottom limit to the benefit.

The credit is also fully refundable, which means that parents who pay little to no taxes will have access to hundreds of more dollars a year than they did under the previous iteration of the child tax credit, which was only partially refundable. This change means the benefit will no longer be denied to the parents who need it the most.

When will payments start to go out?

The American Rescue Plan Act directs the IRS to start sending out payments in July, but it doesn’t specify a specific date. The IRS promised more information “as soon as possible” in a March 12 press release, but to date, it hasn’t released more details.

When they do start to go out, parents receiving the full amount will ideally receive $350 or $300 per child monthly for the last six months of 2021, though it’s possible that larger payments are made less frequently to ease the pressure on the IRS.

Regardless of the frequency of the payments, they’ll only add up to half of the benefit. The other half will be paid out as a tax refund next year.

What about next year?

At this point, the new child tax credit will only be paid out for the 2021 tax year. From the beginning, Biden and the Democrats have been open about their desire to make the credit permanent, and it’s likely that such an extension makes its way into another legislative package later this year.

What is the likely effect of this plan becoming law?

A Columbia University study found that, along with the other proposals in Biden’s plan, a fully refundable child tax credit could cut the child poverty rate in half, from 13.4 percent to 6.6 percent. Its implementation could also continue to build a consensus, after two popular economic aid payments in previous COVID-19 relief bills, that the government can and should simply send people money — especially to children, the poorest population group in the United States. Indeed, the White House has signaled that if the plan is successful, they would move to make the allowance permanent. And given the fact that Mitt Romney has released his own, budget-neutral version of the plan, there’s clearly a strong willingness to simply give people money to raise kids across the aisle.

It’s this kind of consensus that Democrats are relying on to make these changes permanent.