Around 39 million families will receive the automatic payments, which cover about 65 million -- or 88 percent -- of American children. Qualifying families will receive payments of up to $300 per month for each child under the age of 6 and up to $250 per month for every child between age 6 and 17.
The American Rescue Plan signed Thursday by President Joe Biden expands the child tax credit, providing a bigger refund to families and increasing eligibility.
Child Tax Credit
The plan expands the credit from $2,000 annually to $3,000 per child under age 17 and $3,600 per child under age 6. It also includes more low-income households and distributes the credit's benefit through monthly cash payments of $250 or $300 from July through December. Under the proposed schedule, the IRS says families could receive nearly half of their total child tax credit this year and then claim the remaining amount on next year’s tax returns.
To qualify for the credit, the child must be related to you and generally live with you for at least six months during the year. Unlike the previous child tax credit, which only applies the credit toward taxes owed, this expanded credit allows families to receive the full credit as a refund.
According to the White House, households that have already filed an income tax return for 2020 will have that information used by the IRS to determine eligibility and size of payments.
For households that haven’t yet filed for 2020, the IRS will review 2019 records to determine eligibility and size of payment. That includes those who used the “non-filer portal” for previous rounds of payments.
Payments will be made as either direct deposits or paper checks, depending on the method selected by the tax payer when they filed their most recent tax return.
The expansion of the Child Tax Credit is only designed for one year, meaning the program may revert back to its previous form in 2022.
A $10,200 per individual unemployment insurance exclusion for the year 2020 has been added to the law. The household income has to be less than $150,000 adjusted gross income to get the tax free unemployment treatment.
California’s Earned Income Tax Credit
The State of California offers an Earned Income Tax Credit and a Young Child Tax Credit, which applies to low income earners with children under the of 6.
To be eligible for these tax credits, you must file a 2020 tax return. New this tax cycle, certain non-resident workers who file using a Tax Payer Identification Number (TPIN) are eligible for these tax credits.
To qualify for the California credits, you must have taxable earned income under $30,000 and live in California for more than half the year. For the federal EITC, this chart shows the maximum income per household size that qualifies for the credit.
Qualifying earned income may come from W-2 wages, self-employment, salaries or tips. Types of income that do not qualify include pay received for work when you were an inmate in a penal institution, interest and dividends, pensions or annuities, Social Security, unemployment benefits, alimony or child support. If you are married and plan to claim the credit, you cannot file “married filing separately,” according to the state taxation office.
Refundable vs. non-refundable vs. tax deduction
Subtract tax credits from the amount of tax you owe. There are two types of tax credits:
A nonrefundable tax credit means you get a refund only up to the amount you owe. For instance, the tax credit is worth $1,000 but you only owe $600. You don't get to keep the remaining $400.
A refundable tax credit means you get a refund, even if it's more than what you owe. For example, you owe $500 but the tax credit is worth $1,000. You receive the remaining $500 as a tax refund.
Tax deductions are subtracted from your income before you figure out the amount of tax you owe.