My wife and I have three daughters, all currently under the age of 10. Having children is a blessing, but also quite expensive. According to Child Care Aware, a leading voice for widespread access to childcare in America, parents spend roughly $9,200 per child per year on childcare.
The IRS offers certain tax breaks to families with children, even if those tax savings pale in the face of the usual expenses related to having children. But there is some good news: for many parents, cash flow help is on the way.
Advance monthly payments
The American Rescue Plan Act of 2021, signed into law by President Biden on March 11, 2021, enhances the child tax credit in two ways:
• The credit has been increased from $2,000 to a maximum of $3,600 per qualifying child.
• The IRS is fronting eligible taxpayers half of the credit for 2021 with six monthly payments starting in July. Eligible parents could receive up to $300 per child monthly, starting July 15 and continuing through December 15.
Many parents have already received a first letter from the IRS with information on the advance child tax credit payments. A second letter to eligible recipients will provide estimates of how much they will receive as advance monthly payments.
Who and how much?
To be eligible, you must have children or other qualifying dependents who will be under the age of 18 at the end of 2021. The IRS will use your 2020 tax data to determine your eligibility, or your 2019 tax data if you have not yet filed your 2020 return. As to the amount of your payments, it will depend on your annual income and the age of your dependents. As with most IRS programs, the rules are complicated; you can visit http://www.irs.gov/childtaxcredit2021 for all the details.
Two other notes:
• Parents who aren’t required to file a tax return can use the “non-filer sign-up tool” on the IRS website to register for the advance monthly payments (www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool).
• The advance credit is reconciled when you file your 2021 tax return in 2022. If you have more income in 2021 than in 2020 or 2019, you will have to pay back a portion of the credit to the IRS when you file your 2021 return. The IRS is giving taxpayers the option to un-enroll from the monthly advance tax credit payments to avoid having to pay money back.
While the advance monthly tax credit payments aren’t likely to cover all your costs of raising children, the additional cash flow should provide some welcome relief.
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