Adoption Tax Credits (Federal & State) – Requirements & Eligibility

The decision to adopt a child is a big one for any prospective parent, and one of the concerns often has to do with costs. Adoption-related expenses can vary widely depending on whether you work with an agency, adopt from foster care, work directly with the birth parents, or adopt internationally.

Fortunately, there are federal and state assistance programs that minimize financial obstacles to adoption.

Federal Adoption Tax Credit and Adoption Assistance Programs

The U.S. Tax Code provides two separate assistance programs for prospective adoptive parents. Both programs help cover qualified adoption expenses, which the IRS defines as:

  • Reasonable and necessary adoption fees
  • Court costs and attorney fees
  • Traveling expenses (including meals and lodging while away from home)
  • Other expenses directly related to the legal adoption of a child

To qualify, you must pay the expense to adopt a child under the age of 18 or someone of any age who is physically or mentally incapable of self-care. Qualified expenses don’t include expenses paid to adopt a stepchild.

Adoption Tax Credit

The federal adoption tax credit is worth up to $14,300 per child for the 2020 tax year.

Parents who adopt a “special needs” child automatically qualify for the maximum credit, regardless of their actual adoption expenses. The IRS’s definition of a special needs adoption might differ from definitions used elsewhere.

The adoption must meet all three of the following criteria to qualify as a special needs adoption:

  1. The child was a citizen or resident of the U.S. or its possessions when the adoption effort began.
  2. The state determined that the child can’t or shouldn’t return to their parent’s home.
  3. The state determined that the child probably wouldn’t be adoptable unless it assists the adoptive family financially.

Based on those criteria, foreign adoptions aren’t considered special needs. Also, U.S. children with disabilities might not be regarded as special needs if the state doesn’t consider them difficult to place for adoption.

Income Limitations

However, the amount of the federal adoption tax credit phases out for high-income taxpayers. It begins to phase out once your modified adjusted gross income (MAGI) reaches $214,520 and phases out entirely at $254,520.

The credit phases out proportionally if your income is between $214,520 and $254,520.

So if your income is $234,520 — the midpoint of the phase-out range — the amount of your credit is cut in half. If your income is $224,520 — one-quarter of the phase-out range — the amount of your credit is reduced by 25%.

The income limits apply whether you’re single or married and file a joint tax return with your spouse. The adoption tax credit isn’t available if your filing status is married filing separately.

Refundability

The adoption tax credit is nonrefundable. In other words, if it reduces your tax liability for the year below zero, you won’t receive the excess as a tax refund.

However, you can carry any unused credit forward for up to five years, using it to offset your tax liability in the future.

When You Can Claim the Credit

The rules for claiming the credit depend on whether the adoption is domestic or foreign.

Domestic Adoptions

If you adopt a U.S. child, you can claim adoption expenses for the tax year following the year of payment, even if you never finalize the adoption. However, any costs you used to claim the credit on an unsuccessful adoption will reduce the amount you can claim for a subsequent adoption.

For example, say you started the adoption process in 2018, but the adoption fell through. You used $3,000 of expenses to claim the adoption tax credit on your 2019 return.

In 2020, you made another attempt to adopt, spending $10,000, and successfully finalized the adoption that year. When you claim the adoption credit on your 2020 tax return, you can only claim $7,000 of expenses ($10,000 – $3,000).

Foreign Adoptions

If you adopt a child who isn’t yet a citizen or resident of the U.S. or its possessions, you can only claim the credit in the year the adoption becomes final.

For example, say you start adopting a child from Ukraine in 2019 and spend $5,000 that year. You cannot claim the adoption tax credit in 2019 because you didn’t finalize the adoption.

In 2020, you spent another $8,000 and finalized the adoption. You can use all $13,000 of expenses to calculate the credit on your 2020 tax return.

You can claim the federal adoption tax credit by completing Form 8839 and attaching it to your federal income tax return, Form 1040.

Employer-Provided Adoption Benefits

Some employers reimburse employees for adoption expenses. The IRS offers a tax break for these benefits as well, as long as the adoption assistance program meets the following criteria:

  • The program benefits all eligible employees, not just highly compensated employees.
  • The program doesn’t pay more than 5% of its benefits to shareholders or owners (or their spouses or dependents).
  • The employer must give reasonable notice of the plan to eligible employees.
  • Employees must provide reasonable substantiation (such as receipts or other documentation) to show that the payments or reimbursements are for qualifying expenses.

If the program meets that criteria, then the payments or reimbursements don’t count as taxable income on the employee’s federal income tax return, and the employer doesn’t have to withhold federal income tax from the payment. However, the employer must still withhold Social Security and Medicare taxes.

Adoptive families can take advantage of both the adoption tax credit and the income exclusion. However, you can’t claim the exclusion and the credit on the same expenses, and the maximum dollar limit ($14,300 for 2020) still applies.

For example, say you have $15,000 of qualified adoption expenses in 2020, and your employer’s adoption assistance program reimburses a maximum of $9,000. You can use the remaining $5,300 of expenses to calculate your adoption tax credit on your 2020 tax return.

That’s the $14,300 maximum dollar limit, minus the $9,000 of expenses already reimbursed by your employer. You won’t get any tax benefits for the remaining $700 of expenses ($15,000 – $14,300).


State Adoption Tax Credits

Many states offer tax credits for families who adopt children from the public child welfare system. Here’s a summary of tax credits available in each state as of the 2020 tax year:

State Tax Credit Amount
Alabama Yes Up to $1,000
Alaska No income tax
Arizona No
Arkansas Yes Up to 20% of the federal adoption tax credit claimed
California Yes Up to $2,500
Colorado No
Connecticut No
Delaware No
District of Columbia No
Florida No income tax
Georgia Yes Up to $2,000
Hawaii No
Idaho No
Illinois No
Indiana Yes The lesser of $1,000 or 10% of your claimed federal adoption tax credit
Iowa Yes Up to $5,000
Kansas Yes 25% of the adoption tax credit claimed on your federal tax return (up to $1,500)
Kentucky No
Louisiana No
Maine No
Maryland No
Massachusetts Yes Income exemption for adoption fees paid to a licensed adoption agency
Michigan No
Minnesota No
Mississippi Yes Up to $2,500
Missouri Yes Up to $10,000
Montana Yes Up to $1,000
Nebraska No
Nevada No income tax
New Hampshire No tax on wages
New Jersey No
New Mexico Yes Up to $1,000
New York No
North Carolina No
North Dakota No
Ohio Yes Up to $1,500
Oklahoma Yes Tax deduction for up to $20,000 of expenses
Oregon No
Pennsylvania No
Rhode Island No
South Carolina Yes Tax deduction for up $2,000 of expenses
South Dakota No income tax
Tennessee No tax on wages
Texas No income tax
Utah Yes Up to $1,000
Vermont No
Virginia No
Washington No income tax
West Virginia Yes Up to $4,000
Wisconsin Yes Up to $5,000
Wyoming No income tax

The rules for claiming adoption tax breaks vary by state and can change from year to year, so talk to your tax advisor to make sure you qualify.


Final Word

Adopting a child can strain family finances, but tax credits can help offset the costs.

And once you’ve finalized the adoption, remember you may be able to take advantage of several more tax breaks for parents. This includes claiming your adopted child as a dependent and claiming the child tax credit and the child and dependent care credit.

Source: moneycrashers.com

Adoption Tax Credits 2020 (Federal & State) – Requirements & Eligibility

The decision to adopt a child is a big one for any prospective parent, and one of the concerns often has to do with costs. Adoption-related expenses can vary widely depending on whether you work with an agency, adopt from foster care, work directly with the birth parents, or adopt internationally.

Fortunately, there are federal and state assistance programs that minimize financial obstacles to adoption.

Federal Adoption Tax Credit and Adoption Assistance Programs

The U.S. Tax Code provides two separate assistance programs for prospective adoptive parents. Both programs help cover qualified adoption expenses, which the IRS defines as:

  • Reasonable and necessary adoption fees
  • Court costs and attorney fees
  • Traveling expenses (including meals and lodging while away from home)
  • Other expenses directly related to the legal adoption of a child

To qualify, you must pay the expense to adopt a child under the age of 18 or someone of any age who is physically or mentally incapable of self-care. Qualified expenses don’t include expenses paid to adopt a stepchild.

Adoption Tax Credit

The federal adoption tax credit is worth up to $14,300 per child for the 2020 tax year.

Parents who adopt a “special needs” child automatically qualify for the maximum credit, regardless of their actual adoption expenses. The IRS’s definition of a special needs adoption might differ from definitions used elsewhere.

The adoption must meet all three of the following criteria to qualify as a special needs adoption:

  1. The child was a citizen or resident of the U.S. or its possessions when the adoption effort began.
  2. The state determined that the child can’t or shouldn’t return to their parent’s home.
  3. The state determined that the child probably wouldn’t be adoptable unless it assists the adoptive family financially.

Based on those criteria, foreign adoptions aren’t considered special needs. Also, U.S. children with disabilities might not be regarded as special needs if the state doesn’t consider them difficult to place for adoption.

Income Limitations

However, the amount of the federal adoption tax credit phases out for high-income taxpayers. It begins to phase out once your modified adjusted gross income (MAGI) reaches $214,520 and phases out entirely at $254,520.

The credit phases out proportionally if your income is between $214,520 and $254,520.

So if your income is $234,520 — the midpoint of the phase-out range — the amount of your credit is cut in half. If your income is $224,520 — one-quarter of the phase-out range — the amount of your credit is reduced by 25%.

The income limits apply whether you’re single or married and file a joint tax return with your spouse. The adoption tax credit isn’t available if your filing status is married filing separately.

Refundability

The adoption tax credit is nonrefundable. In other words, if it reduces your tax liability for the year below zero, you won’t receive the excess as a tax refund.

However, you can carry any unused credit forward for up to five years, using it to offset your tax liability in the future.

When You Can Claim the Credit

The rules for claiming the credit depend on whether the adoption is domestic or foreign.

Domestic Adoptions

If you adopt a U.S. child, you can claim adoption expenses for the tax year following the year of payment, even if you never finalize the adoption. However, any costs you used to claim the credit on an unsuccessful adoption will reduce the amount you can claim for a subsequent adoption.

For example, say you started the adoption process in 2018, but the adoption fell through. You used $3,000 of expenses to claim the adoption tax credit on your 2019 return.

In 2020, you made another attempt to adopt, spending $10,000, and successfully finalized the adoption that year. When you claim the adoption credit on your 2020 tax return, you can only claim $7,000 of expenses ($10,000 – $3,000).

Foreign Adoptions

If you adopt a child who isn’t yet a citizen or resident of the U.S. or its possessions, you can only claim the credit in the year the adoption becomes final.

For example, say you start adopting a child from Ukraine in 2019 and spend $5,000 that year. You cannot claim the adoption tax credit in 2019 because you didn’t finalize the adoption.

In 2020, you spent another $8,000 and finalized the adoption. You can use all $13,000 of expenses to calculate the credit on your 2020 tax return.

You can claim the federal adoption tax credit by completing Form 8839 and attaching it to your federal income tax return, Form 1040.

Employer-Provided Adoption Benefits

Some employers reimburse employees for adoption expenses. The IRS offers a tax break for these benefits as well, as long as the adoption assistance program meets the following criteria:

  • The program benefits all eligible employees, not just highly compensated employees.
  • The program doesn’t pay more than 5% of its benefits to shareholders or owners (or their spouses or dependents).
  • The employer must give reasonable notice of the plan to eligible employees.
  • Employees must provide reasonable substantiation (such as receipts or other documentation) to show that the payments or reimbursements are for qualifying expenses.

If the program meets that criteria, then the payments or reimbursements don’t count as taxable income on the employee’s federal income tax return, and the employer doesn’t have to withhold federal income tax from the payment. However, the employer must still withhold Social Security and Medicare taxes.

Adoptive families can take advantage of both the adoption tax credit and the income exclusion. However, you can’t claim the exclusion and the credit on the same expenses, and the maximum dollar limit ($14,300 for 2020) still applies.

For example, say you have $15,000 of qualified adoption expenses in 2020, and your employer’s adoption assistance program reimburses a maximum of $9,000. You can use the remaining $5,300 of expenses to calculate your adoption tax credit on your 2020 tax return.

That’s the $14,300 maximum dollar limit, minus the $9,000 of expenses already reimbursed by your employer. You won’t get any tax benefits for the remaining $700 of expenses ($15,000 – $14,300).


State Adoption Tax Credits

Many states offer tax credits for families who adopt children from the public child welfare system. Here’s a summary of tax credits available in each state as of the 2020 tax year:

State Tax Credit Amount
Alabama Yes Up to $1,000
Alaska No income tax
Arizona No
Arkansas Yes Up to 20% of the federal adoption tax credit claimed
California Yes Up to $2,500
Colorado No
Connecticut No
Delaware No
District of Columbia No
Florida No income tax
Georgia Yes Up to $2,000
Hawaii No
Idaho No
Illinois No
Indiana Yes The lesser of $1,000 or 10% of your claimed federal adoption tax credit
Iowa Yes Up to $5,000
Kansas Yes 25% of the adoption tax credit claimed on your federal tax return (up to $1,500)
Kentucky No
Louisiana No
Maine No
Maryland No
Massachusetts Yes Income exemption for adoption fees paid to a licensed adoption agency
Michigan No
Minnesota No
Mississippi Yes Up to $2,500
Missouri Yes Up to $10,000
Montana Yes Up to $1,000
Nebraska No
Nevada No income tax
New Hampshire No tax on wages
New Jersey No
New Mexico Yes Up to $1,000
New York No
North Carolina No
North Dakota No
Ohio Yes Up to $1,500
Oklahoma Yes Tax deduction for up to $20,000 of expenses
Oregon No
Pennsylvania No
Rhode Island No
South Carolina Yes Tax deduction for up $2,000 of expenses
South Dakota No income tax
Tennessee No tax on wages
Texas No income tax
Utah Yes Up to $1,000
Vermont No
Virginia No
Washington No income tax
West Virginia Yes Up to $4,000
Wisconsin Yes Up to $5,000
Wyoming No income tax

The rules for claiming adoption tax breaks vary by state and can change from year to year, so talk to your tax advisor to make sure you qualify.


Final Word

Adopting a child can strain family finances, but tax credits can help offset the costs.

And once you’ve finalized the adoption, remember you may be able to take advantage of several more tax breaks for parents. This includes claiming your adopted child as a dependent and claiming the child tax credit and the child and dependent care credit.

Source: moneycrashers.com

More Monthly Child Credit Payments, Higher Child Care Credit, and Other Tax Breaks in Biden’s Latest Plan

In March, the American Rescue Plan Act made several tax credits better. And, in one case, it requires the IRS to send monthly payments to families with children. However, the enhancements are only temporary – they only apply for the 2021 tax year.

The Biden administration sees those temporary improvements as simply a first step. So now President Biden wants to extend the expanded tax credits and continue supporting low- and middle-income families, as well as low-income workers without children, with tax reductions beyond this year.

That’s the goal of the tax-cutting provisions in the president’s American Families Plan. The $1.8 trillion package would also do many other things for ordinary Americans, such as providing universal pre-school, free community college, guaranteed family and medical leave, caps on child-care costs, and much more. All these – along with the extended tax credit enhancements – are designed to “build a stronger economy that does not leave anyone behind.”

It’s way too soon to tell if any of the tax credit extensions – or any other part of the American Families Plan – will make it through Congress and be signed into law. There will be stiff resistance from Republicans in Congress, and a few Democrats are likely to push back on some of the more costly items, too. Biden’s plan is just the starting point for further negotiations, so we’ll just have to wait and see how things progress from here. But in the meantime, we can take a look at the 4 tax credit enhancements that President Biden wants to extend. If you qualify, you’re already going to save a lot of money in 2021. If the extensions become law, you could pocket even more cash in 2022 and for years to come.

1 of 4

Child Tax Credit

picture of a happy family at home on their sofapicture of a happy family at home on their sofa

For tax years before 2021, the child tax credit is worth $2,000 per dependent child 16 years old or younger. It begins to phase out if your adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return. Once your AGI surpasses $400,000 or $200,000, the credit amount is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount. Up to $1,400 of the child credit is refundable for some lower-income individuals with children. But you must also have at least $2,500 of earned income to get a refund.

Thanks to the American Rescue Plan, the 2021 credit amount is increased to $3,000 per child ($3,600 per child under age 6) for many families. Children who are 17 years old qualify for the credit, too. The credit is also fully refundable for 2021, and the $2,500 earnings floor is eliminated. In addition, the IRS will pay half of this year’s credit in advance by sending monthly payments to families from July to December 2021. (To see how much you’ll get, use Kiplinger’s 2021 Child Tax Credit Calculator.)

The new American Families Plan, if enacted, would generally extend the 2021 child tax credit enhancements through 2025 (including, presumably, the monthly payments). There would be one important difference, though. The new plan would make the credit full refundable on a permanent basis.

For more on the 2021 credit, see Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs.

2 of 4

Child and Dependent Care Credit

picture of young children gathered around a preschool teacher who is reading a bookpicture of young children gathered around a preschool teacher who is reading a book

The American Rescue Plan also expanded the child and dependent care tax credit for 2021. This will boost tax refunds for many parents when they file their tax return next year.

For the 2020 tax year, if your children were younger than 13, you were eligible for a 20% to 35% non-refundable credit for up to $3,000 in childcare expenses for one kid or $6,000 for two or more. The percentage dropped as income exceeded $15,000.

The American Rescue Plan made several enhancements to the credit for the 2021 tax year. First, it made the credit refundable for the year. It also bumped the maximum credit percentage up from 35% to 50%. More childcare expenses are subject to the credit, too. Instead of up to $3,000 in childcare expenses for one child and $6,000 for two or more, the 2021 credit is allowed for up to $8,000 in expenses for one child and $16,000 for multiple children. When combined with the 50% maximum credit percentage, that puts the top credit for the 2021 tax year at $4,000 for families with just one child and $8,000 for families with more kids. The full credit will also be allowed for families making less than $125,000 a year (instead of $15,000 per year). After that, the credit starts to phase-out. However, all families making between $125,000 and $440,000 will receive at least a partial credit for 2021. (For more information, see Child Care Tax Credit Expanded for 2021.)

The American Families Plan would make these enhancements permanent. If it becomes law, parents paying for childcare will continue to see lower tax bills and/or higher refunds until their youngest kid turns 13.

3 of 4

Earned Income Tax Credit

picture of a fry cook standing with arms folded in front of a grillpicture of a fry cook standing with arms folded in front of a grill

The earned income tax credit (EITC) provides an incentive for people to work. And, under the American Rescue Plan, more workers without qualifying children will qualify for the credit on their 2021 tax return and the “childless EITC” amounts will be higher.

For 2020 tax returns, the maximum EITC ranges from $538 to $6,660 depending on your income and how many children you have. However, there are income limits for the credit. For example, if you have no children, your 2020 earned income and adjusted gross income (AGI) must each be less than $15,820 for singles and $21,710 for joint filers. If you have three or more children and are married, though, your 2020 earned income and AGI can be as high as $56,844. If you don’t have a qualifying child, you must be between 25 and 64 years old at the end of the tax year to claim the EITC.

The American Rescue Plan expanded the 2021 EITC for childless workers in a few ways. First, it generally lowers the minimum age from 25 to 19 (except for certain full-time students). It also eliminates the maximum age limit (65), so older people without qualifying children can claim the 2021 credit, too. The maximum credit available for childless workers is also increased from $543 to $1,502 for the 2021 tax year. Expanded eligibility rules for former foster youth and homeless youth apply as well.

Under the just-released American Families Plan, the credit enhancements for childless workers will be made permanent. If enacted, the enhancements for workers without children would join other changes made by the American Rescue Plan that continue past 2021 to:

  • Allow workers to claim the EITC even if their children can’t satisfy the identification requirements;
  • Permit certain married but separated couples to claim the EITC on separate tax returns; and
  • Increase the limit on a worker’s investment income from $3,650 (for 2020) to $10,000 (adjusted for inflation after 2021).

4 of 4

Premium Tax Credit

picture of a stethoscope laying on several one-hundred dollar bills picture of a stethoscope laying on several one-hundred dollar bills

The premium tax credit helps eligible Americans cover the premiums for health insurance purchased through an Obamacare exchange (e.g., HealthCare.gov). The American Rescue Plan enhanced the credit for 2021 and 2022 to lower premiums for people who buy coverage on their own. First, it increases the credit amount for eligible taxpayers by reducing the percentage of annual income that households are required to contribute toward the premium. It also allows the credit to be claimed by people with an income above 400% of the federal poverty line. According to the White House, these changes will save about 9 million families an average of $50 per person per month.

The American Families Plan would make these changes permanent to lower health insurance costs beyond 2022.

However, it’s not clear if the American Families Plan would extend the suspension of advance payment repayments. When you purchase insurance through the exchange, you can choose to have an estimated credit amount paid in advance to your insurance company so that less money comes out of your own pocket to pay your monthly premiums. Then, when you complete your tax return, you’ll calculate your credit and compare it to the advance payments. If the advance payments are greater than your actual allowable credit, the difference (subject to certain repayment caps) is subtracted from your refund or added to the tax you owe. If your allowable credit is more than the advance payments, you’ll get the difference back in the form of a larger refund or smaller tax bill. The American Rescue Plan suspended the repayment of excess advanced payments for the 2020 tax year. (If you already filed your 2020 tax return and repaid any excess advance payments, the IRS will automatically adjust your return and send you a refund if necessary.)

We suspect that the American Families Plan wouldn’t extend the repayment suspension. This, we believe, was and is intended to be a one-year-only rule to help people struggling during the COVID-19 pandemic.

Source: kiplinger.com

You Could Get a Tax Refund for Unemployment Benefits in May

If you’re among the 40 million Americans who received unemployment compensation in 2020 and you’ve already filed your taxes, you could be getting a surprise refund.

The IRS announced that it would start issuing refunds in May to taxpayers who have submitted returns but qualify for a tax break on 2020 jobless benefits. Refunds will continue into the summer months.

Typically, unemployment benefits are taxed as ordinary income. But the $1.9 trillion American Rescue Plan that President Joe Biden signed into law on March 11 shields the first $10,200 of unemployment benefits for households with incomes under $150,000. If you’re married, each spouse can exclude the first $10,200 of unemployment benefits.

The new law, passed in the middle of tax season, left people who qualified for the tax break wondering if they’d need to file an amended return. But the IRS says that won’t be necessary. The IRS will automatically reconfigure the correct amount of unemployment compensation and taxes due, then either issue any extra money as a refund or apply it to taxes owed.

It’s not clear whether you’ll need to file an amended return if the tax break makes you eligible for certain tax credits, like the Earned Income Tax Credit.

You Still May Not Get a Break on State Taxes

Your state may not be feeling quite as generous as Uncle Sam. According to H&R Block, the following 13 states have yet to pass changes to exempt some unemployment from state taxes:

  • Colorado
  • Georgia
  • Hawaii
  • Idaho
  • Kentucky
  • Massachusetts
  • Minnesota
  • Mississippi
  • North Carolina
  • New York
  • Rhode Island
  • South Carolina
  • West Virginia

H&R block has suggested holding off on filing if you live in one of these 13 states and received unemployment benefits in 2020 in case your state changes its law.

What if I Haven’t Filed Yet?

If you haven’t filed your taxes yet, you can go ahead and use free tax filing software to submit your return. They’ll ask you a few questions to determine whether you qualify for the unemployment tax break.

The IRS has instructions on its website for those filing a paper return. But we’d strongly recommend filing online. The IRS has a huge backlog of unprocessed paper returns from 2019. Filing by paper could add months to the time it takes to process your return.

If you can’t afford your tax bill, even after the unemployment tax break, it’s still essential that you file your taxes or file for an extension by May 17. Note that filing for an extension only buys you time to file, but any money you owe is still technically due on May 17 — a month later than usual due to the tax deadline extension. You’ll minimize your penalties by filing an on-time return, even if you can’t pay anything.

Once you are able to resume payments, you can typically automatically get approved for an online payment plan within minutes. You can spread the bill out over up to 72 months in some cases if you sign up for an IRS installment plan.

One thing to keep in mind is that the tax break on unemployment is for 2020 only. If you’re still receiving benefits, consider having 10% automatically withheld by filing IRS Form W-4V if doing so wouldn’t put you behind on bills.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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Source: thepennyhoarder.com

Is the stimulus taxable? – Lexington Law

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

In April 2020, the American government sent out the first round of stimulus checks (also known as “economic impact payments”) to qualifying individuals. This financial relief was approved under the Coronavirus Aid, Relief and Economic Security (CARES) Act. This first check was for up to $1,200 per person. With the pandemic lasting longer than was initially expected, the second round of stimulus check funding was approved and sent out in January 2021. This time the amount was up to $600 per person.

Now, as another COVID relief package has been approved, a third stimulus payment is being sent out. This check amount will be the highest one to date—up to $1,400 per person. 

Tax season has arrived again, and many people are wondering whether the stimulus is taxable, since all income is usually taxable unless expressly excluded. Luckily, the answer to this question is mostly a positive one: No, your stimulus checks aren’t taxable. However, they might affect some people’s tax refunds. 

The stimulus money is not taxable income

The IRS considers the stimulus checks a tax credit, not income. Regarding the economic impact payments, the IRS website clearly states that if you received the money because you qualified, you won’t have to pay taxes on it. 

The stimulus checks were a tax credit that was essentially paid out early. While a tax deduction lowers your taxable income, a tax credit is a dollar-for-dollar credit that decreases the amount of taxes owed. Usually, tax credits aren’t given out as checks, but an exception was made for the pandemic. The credit was sent out as a payment so Americans wouldn’t have to wait to file their 2020 tax return to receive the financial aid. 

There has been some speculation that the stimulus payments were like an advance on your usual tax refund and, therefore, you won’t get your regular refund this year. However, that’s not true. 

You won’t include the stimulus payments as part of your gross income, which means the stimulus payments won’t decrease your tax refund. See further down, however, for some state income tax implications that can inadvertently impact your tax refund.

Additionally, it’s important to note that since the stimulus checks aren’t considered income, they won’t affect a person’s ability to qualify for federal benefit programs or federal government assistance. Many people qualify for stimulus checks and unemployment insurance at the same time. 

What is the Recovery Rebate Credit?

The Recovery Rebate Credit is for people who didn’t receive the stimulus money when they should have. This might have happened due to an error or because a person filed differently on their 2020 taxes versus their 2018 or 2019 taxes.

For example, if a 20-year-old filed as a dependent on their 2019 taxes, that would have disqualified them from the stimulus check. But if that same individual files independently on their 2020 taxes, they’re eligible to receive the money retroactively. Other things that could have changed your eligibility in 2020 include bearing a child or seeing a drop in income. 

The Recovery Rebate Credit will show up as a potential line item on your Form 1040 income tax return. If you qualify and fill out Line 30, your stimulus money can be added as a credit to your income tax return. This means a person who claims the tax credit successfully will see their tax debt decreased or their tax refund increased. 

Let’s say you qualified for the initial $1,200 stimulus payment and didn’t receive it. You complete your tax return and find you’re going to get $800 back. However, once you add in the $1,200 Recovery Rebate Credit, you’ll find the government actually owes you a $2,000 tax refund. The Recovery Rebate Credit is “refundable,” so you do get the money from the government after filing. 

What is the deadline for filing taxes?

Last year, the IRS extended the tax deadline from April 15 to July 15, 2020. An extension was announced for 2021, pushing the deadline back to May 17. Generally speaking, the sooner you file, the sooner you can get your refund, so keep this in mind when considering when to do your taxes.

How will my 2020 taxes affect the third stimulus check?

The first two payments (of up to $1,200 and $600, respectively) were based on 2018 and 2019 tax returns. The third stimulus check will look at your most recent tax return to determine eligibility, so if you’ve already filed, that would be your 2020 taxes, but if you haven’t, that would be your 2019 taxes. 

While your stimulus check won’t impact your federal taxes, it can affect some state taxes. Alabama, Iowa, Louisiana, Missouri, Montana and Oregon all allow for federal tax to be deductible against state taxable income. 

So let’s say an individual who lives in Iowa received the first stimulus payment of $1,200 for themselves but didn’t receive the $500 for their qualifying dependent under 17 years of age. In this example, the individual received both of their qualifying payments for the second stimulus round, so they only missed out on the $500. So, this person adds the $500 credit to Line 30 on their Form 1040.

If the filer had owed $2,000 in federal taxes, they would now only owe $1,500. Before claiming the $500 Recovery Rebate Credit, this filer could have subtracted $2,000 from their taxable income on their state return. But since that number has been lowered to $1,500, their state tax liability will be higher. 

What should I do with my tax refund?

People often mistakenly see their tax refund as “fun money” to spend on activities or purchases. In reality, financial experts always recommend you act wisely with your tax refund. 

Jackie Beck is a debt reduction expert and the creator of the app Pay Off Debt. Beck encourages people to understand that their tax refund isn’t free money. Beck says, “It’s money you earned all year long. You worked for it, so you may as well use it to achieve your goals instead of blowing it.”

Some of the best ways you can spend your tax refund include:

  • Paying off debt, especially high-interest debt like credit card debt or personal loans
  • Increasing your savings, especially if you don’t have emergency savings
  • Investing in stocks, bonds or mutual funds
  • Donating to a good cause
  • Investing in a service such as credit repair to improve your financial health going forward

Making good use of your tax refund can set you on the path toward a stronger financial future. 


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah, North Carolina and Virginia.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

Is the stimulus taxable?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

In April 2020, the American government sent out the first round of stimulus checks (also known as “economic impact payments”) to qualifying individuals. This financial relief was approved under the Coronavirus Aid, Relief and Economic Security (CARES) Act. This first check was for up to $1,200 per person. With the pandemic lasting longer than was initially expected, the second round of stimulus check funding was approved and sent out in January 2021. This time the amount was up to $600 per person.

Now, as another COVID relief package has been approved, a third stimulus payment is being sent out. This check amount will be the highest one to date—up to $1,400 per person. 

Tax season has arrived again, and many people are wondering whether the stimulus is taxable, since all income is usually taxable unless expressly excluded. Luckily, the answer to this question is mostly a positive one: No, your stimulus checks aren’t taxable. However, they might affect some people’s tax refunds. 

The stimulus money is not taxable income

The IRS considers the stimulus checks a tax credit, not income. Regarding the economic impact payments, the IRS website clearly states that if you received the money because you qualified, you won’t have to pay taxes on it. 

The stimulus checks were a tax credit that was essentially paid out early. While a tax deduction lowers your taxable income, a tax credit is a dollar-for-dollar credit that decreases the amount of taxes owed. Usually, tax credits aren’t given out as checks, but an exception was made for the pandemic. The credit was sent out as a payment so Americans wouldn’t have to wait to file their 2020 tax return to receive the financial aid. 

There has been some speculation that the stimulus payments were like an advance on your usual tax refund and, therefore, you won’t get your regular refund this year. However, that’s not true. 

You won’t include the stimulus payments as part of your gross income, which means the stimulus payments won’t decrease your tax refund. See further down, however, for some state income tax implications that can inadvertently impact your tax refund.

Additionally, it’s important to note that since the stimulus checks aren’t considered income, they won’t affect a person’s ability to qualify for federal benefit programs or federal government assistance. Many people qualify for stimulus checks and unemployment insurance at the same time. 

What is the Recovery Rebate Credit?

The Recovery Rebate Credit is for people who didn’t receive the stimulus money when they should have. This might have happened due to an error or because a person filed differently on their 2020 taxes versus their 2018 or 2019 taxes.

For example, if a 20-year-old filed as a dependent on their 2019 taxes, that would have disqualified them from the stimulus check. But if that same individual files independently on their 2020 taxes, they’re eligible to receive the money retroactively. Other things that could have changed your eligibility in 2020 include bearing a child or seeing a drop in income. 

The Recovery Rebate Credit will show up as a potential line item on your Form 1040 income tax return. If you qualify and fill out Line 30, your stimulus money can be added as a credit to your income tax return. This means a person who claims the tax credit successfully will see their tax debt decreased or their tax refund increased. 

Let’s say you qualified for the initial $1,200 stimulus payment and didn’t receive it. You complete your tax return and find you’re going to get $800 back. However, once you add in the $1,200 Recovery Rebate Credit, you’ll find the government actually owes you a $2,000 tax refund. The Recovery Rebate Credit is “refundable,” so you do get the money from the government after filing. 

What is the deadline for filing taxes?

Last year, the IRS extended the tax deadline from April 15 to July 15, 2020. An extension was announced for 2021, pushing the deadline back to May 17. Generally speaking, the sooner you file, the sooner you can get your refund, so keep this in mind when considering when to do your taxes.

How will my 2020 taxes affect the third stimulus check?

The first two payments (of up to $1,200 and $600, respectively) were based on 2018 and 2019 tax returns. The third stimulus check will look at your most recent tax return to determine eligibility, so if you’ve already filed, that would be your 2020 taxes, but if you haven’t, that would be your 2019 taxes. 

While your stimulus check won’t impact your federal taxes, it can affect some state taxes. Alabama, Iowa, Louisiana, Missouri, Montana and Oregon all allow for federal tax to be deductible against state taxable income. 

So let’s say an individual who lives in Iowa received the first stimulus payment of $1,200 for themselves but didn’t receive the $500 for their qualifying dependent under 17 years of age. In this example, the individual received both of their qualifying payments for the second stimulus round, so they only missed out on the $500. So, this person adds the $500 credit to Line 30 on their Form 1040.

If the filer had owed $2,000 in federal taxes, they would now only owe $1,500. Before claiming the $500 Recovery Rebate Credit, this filer could have subtracted $2,000 from their taxable income on their state return. But since that number has been lowered to $1,500, their state tax liability will be higher. 

What should I do with my tax refund?

People often mistakenly see their tax refund as “fun money” to spend on activities or purchases. In reality, financial experts always recommend you act wisely with your tax refund. 

Jackie Beck is a debt reduction expert and the creator of the app Pay Off Debt. Beck encourages people to understand that their tax refund isn’t free money. Beck says, “It’s money you earned all year long. You worked for it, so you may as well use it to achieve your goals instead of blowing it.”

Some of the best ways you can spend your tax refund include:

  • Paying off debt, especially high-interest debt like credit card debt or personal loans
  • Increasing your savings, especially if you don’t have emergency savings
  • Investing in stocks, bonds or mutual funds
  • Donating to a good cause
  • Investing in a service such as credit repair to improve your financial health going forward

Making good use of your tax refund can set you on the path toward a stronger financial future. 


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah, North Carolina and Virginia.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

First Time Homebuyer Tax Credit May Be Extended To All Homebuyers And Increased to $15,000 Through New Bill

The last few months have seen an increase in home sales to first time homebuyers, as well as a slight improvement in the real estate market as a whole.  A lot of people feel that this is largely due to the first time homebuyer tax credit that the Obama administration passed earlier this year. The measure, which was passed as a part of February’s stimulus package, gives first time homebuyers tax credits of up to $8000 when they buy their first home.  It certainly is an attractive offer if you’re looking for a home anyway – and we have several friends that have bought homes this summer because it was such a great deal.

A couple of weeks ago I wrote about how the time that was available to take advantage of the tax credit was quickly running out.  The credit is only applicable to home purchases that have been completed by December 1st, and since most home closings can take anywhere from 30-60 days,  if you haven’t already put in a purchase agreement on a house by now, you may be out of luck!

For a lot of people that is going to come as a big shock and a disappointment, but all hope is not gone!   Congress is already talking about extending the program, and possibly expanding it to all homeowners and increasing the credit to $15,000.  It is far from a done deal, but it is currently being debated by our legislators.

the National Association of Realtors wants to expand the tax credit to $15,000, and it wants to allow all buyers to be able to qualify, not just those who have been out of the market for three years, according to The New York Times. The $15,000 figure is actually the amount that the credit’s initial sponsor in Congress, Sen. Johnny Isakson, R-Ga., a former real estate agent, had wanted. Now Isakson is introducing a bill that would provide up to a $15,000 tax credit to any buyer who stays in their newly purchased home for a minimum of two years, according to the Times.

So Congress currently has bills that are being put forward that would extend the tax credit, increase it to $15,000 and allow all homebuyers (not just new homebuyers) to take advantage of the credit.  Whether this bill will pass is another matter.  It is currently up for debate, and the president is debating whether continuing it would be a good plan.

Asked about whether the Obama administration would consider extending the credit, White House spokesman Robert Gibbs said the administration’s economic team was evaluating the impact on new home sales and would make a recommendation to the president, according to the Associated Press.

The tax credit has been expensive, but it has arguably been successful in helping the ailing real estate and construction industries survive in recent months. However, like other supposedly temporary tax credits, the First-Time Homebuyer Tax Credit may end up being called the Perennial Homebuyer Tax Credit.

One of the biggest problems the bill faces is the price tag.  Estimates say that it could cost anywhere from $50 billion to $100 billion dollars.   Whether that is worth it right now is debatable.

Only time will tell if Washington will decide to continue the program.  If they do I can already hear all of the people complaining that they “only got $8,000”, or from others who want this credit to become permanent – not just a one-time deal.

UPDATE:  New First Time Homebuyer Tax Credit Bill Extension Introduced

A bill introduced last night after I wrote this post would now extend the tax credit for another 6 months, while not changing the the amount of the credit,  or who is qualified to receive the credit.  From housingwire.com:

A senate bill introduced late Thursday would extend the $8,000 first-time homebuyer tax credit for six months after its current November 30 expiration date.

Maryland Democrat Sen. Benjamin Cardin introduced S.B. 1678, and it is co-sponsored by senators John Ensign (R-Nev.), Johnny Isakson (R-Ga.), Senate majority leader Harry Reid (D-Nev.) and Debbie Stabenow (D-Migh.)…

The bill would not change anything on the tax credit except its expiration date, although at least one housing industry group is calling for an expansion of the credit and another, the National Association of Realtors (NAR), has urged an extension of the tax credit.

So if this were to particular bill were to pass, the tax credit would be extended, but not increased or changed to include all homebuyers.

UPDATE:  11/5/2009

Bill passed by Senate and House to extend the $8000 tax credit. Now only needs to be signed by the president.  Extends the bill to include a $6500 current owner homebuyer tax credit.

What do you think?  Should the tax credit for homebuyers be increased to $15,000 and be expanded to all homebuyers?  Will the effect it has on our economy be worth it, or will it just be another over-reaching expenditure of taxpayer money?  Would you rather they just extend the current program? Let us know your thoughts in the comments!

Source: biblemoneymatters.com

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

The child tax credit is bigger and better than ever for 2021, which should make things a little easier for families taking a financial hit during the COVID-19 pandemic. Thanks to the newly enacted $1.9 trillion American Rescue Plan Act of 2021 (“American Rescue Plan”), the credit amount is significantly increased for one year, and the IRS is required to make advance payments to qualifying families in the second half of 2021.

But the changes are complicated and won’t help everyone. For instance, there are now two ways in which the credit can be reduced for upper-income families. That means some parents won’t qualify for a larger credit and, as before, some won’t receive any credit at all. The IRS also has a lot of wiggle room when it comes to the advance payments, so it’s hard to predict the size of these payments or exactly when you’ll get them. More children will qualify for the credit in 2021, too. And, if you have more than one kid, the credit amount could differ from one child to another.

It’s all enough to make your head spin. But don’t worry – we have answers to a lot of the questions parents are asking right now about the 2021 child credit. We also have a handy 2021 Child Tax Credit Calculator that lets you estimate the amount of your credit and the expected advance payments. Once you read through the FAQs below and try out the calculator, you should feel more at easy about the 2021 credit.

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2020 Child Tax Credit

picture of calculator with "Tax 2020" showing on the screenpicture of calculator with "Tax 2020" showing on the screen

Question: What were the rules for the 2020 child tax credit?

Answer: For 2020 tax returns, which are due by April 15 of this year, the child tax credit is worth $2,000 per kid under the age of 17 claimed  as a dependent on your return. The child must be related to you and generally live with you for at least six months during the year. He or she must also be a citizen, national or resident alien of the United States and have a Social Security number. You must put the child’s name, date of birth and SSN on the return, too.

The credit begins to phase out if your adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return. Once you reach the $400,000 or $200,000 AGI threshold, the credit amount is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount.

Up to $1,400 of the child credit is refundable for some lower-income individuals with children. However, you must also have at least $2,500 of earned income to get a refund.

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Changes Made for 2021

picture of two signs saying "Goodbye 2020" and "Welcome 2021"picture of two signs saying "Goodbye 2020" and "Welcome 2021"

Question: What changes did Congress make to the child tax credit?

Answer: The American Rescue Plan temporarily expands the child tax credit for 2021. First, it allows 17-year-old children to qualify for the credit. Second, it increases the credit to $3,000 per child ($3,600 per child under age 6) for many families. Third, it makes the credit fully refundable and removes the $2,500 earnings floor. Fourth, it requires half of the credit to be paid in advance by having the IRS send periodic payments to families from July 2021 to December 2021.

Note that the other general rules for child-tax-credit eligibility continue to apply. For instance, the child still must be a U.S. citizen, national or resident alien and have a Social Security number. You also must claim him or her as a dependent on your 2021 tax return, and the child must be related to you and generally live with you for at least six months during the year. And you still have to put the child’s name, date of birth and SSN on the return.

3 of 18

Qualifying for the Higher Credit Amount

picture of three child with disappointed looks sitting on a couchpicture of three child with disappointed looks sitting on a couch

Question: Do all families qualify for the higher per-child tax credit of $3,000 or $3,600?

Answer: No, not all families with children will get the higher child tax credit, but most will. The enhanced tax break begins to phase out at AGIs of $75,000 on single returns, $112,500 on head-of-household returns and $150,000 on joint returns. The amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount. Note that this phaseout is limited to the $1,000 or $1,600 temporary increased credit for 2021 and not to the $2,000 credit.

For example, if a married couple has one child who is four years old, files a joint return, and has an AGI of $160,000 for 2021, they won’t get the full $3,600 enhanced credit. Instead, since their AGI is $10,000 above the phase-out threshold for joint filers ($150,000), their credit is reduced by $500 ($50 x 10) – resulting in a final 2021 credit of $3,100.

4 of 18

Additional Phase-Out

picture of rich family getting on a private jetpicture of rich family getting on a private jet

Question: If my 2021 income is higher than the thresholds for taking the $3,000 or $3,600 per-child tax credit, can I still claim the $2,000 credit when I file my return?

Answer: It depends. Families who aren’t eligible for the $3,000 or $3,600 credit in 2021, but who have AGIs at or below $400,000 on joint returns or $200,000 on other returns, could claim the regular credit of $2,000 per child, less the amount of any advance payments they get. Families with AGIs above the $400,000/$200,000 thresholds will see the $2,000 per-child credit reduced by $50 for each $1,000 (or fraction thereof) of AGI over those thresholds.

For example, if a married couple has one child who is seven years old, files a joint return, and has an AGI of $415,000 for 2021, they won’t get the full $3,000 enhanced credit. First, because of their high income, they don’t qualify for the extra $1,000 (see question above), so their credit is reduced to the regular amount of $2,000. Then, since their AGI is $15,000 above the second phase-out threshold for joint filers ($400,000), their credit is reduced again by $750 ($50 x 15) – resulting in a final 2021 credit of $1,250.

5 of 18

17-Year-Old Children

picture of birthday cake with a "one" and a "seven" candle on itpicture of birthday cake with a "one" and a "seven" candle on it

Question: Can I take the higher child tax credit for my daughter who turns 17 in 2021?

Answer: Yes. If you meet all the other rules for taking the child tax credit, you can claim the credit for your daughter when you file your 2021 Form 1040 next year. The American Rescue Plan broadened the age for children qualifying for the credit for 2021 from 16 and under to 17 and under. So, 17-year-olds qualify as eligible children for the child credit for 2021.

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Fully Refundable

picture of a tax form focused on the refund linepicture of a tax form focused on the refund line

Question: What does it mean that the child tax credit is fully refundable for 2021?

Answer: The American Rescue Plan makes the child credit fully refundable for people who live in the United States for more than one half of the year. Before this change, certain low-income people could only get up to $1,400 per child as a refund, instead of the full $2,000 child credit, if their child credit was more than the taxes they otherwise owed. Under the new rules for 2021, people who qualify for a child tax credit can receive the full credit as a refund, even if they have no tax liability.

Parents don’t need to be employed or otherwise have earnings in order to claim the child credit for 2021. Prior rules limited the credit to families having at least $2,500 of earned income. For 2021, families with no earned income can take the child credit if they meet all the other rules.

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Information from Tax Returns

picture of a 2020 tax formpicture of a 2020 tax form

Question: Who gets the advance payments?

Answer: The American Rescue Plan requires the IRS to pay half of the tax credit in advance. If all goes as planned, the IRS will send out a payment (mainly in the form of direct deposits) periodically from July through December to eligible families. The IRS will base eligibility for the credit and advance payments, and calculate the amount of the advance payment, based on previously filed tax returns. It will first look to your 2020 return, and if a 2020 return has not yet been filed, the IRS will look to your 2019 return.

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Timing and Frequency of Advance Payments

picture of calendar showing July 2021picture of calendar showing July 2021

Question: When will the IRS start making payments, and how many payments will I get?

Answer: Democratic lawmakers want the IRS to start making monthly payment of the credit to eligible families from July to December 2021. This gives the agency just a few months’ lead time to set up its computer systems to handle such a massive program. It’s unclear whether the IRS can get this up and running by July and make monthly remittances. If it does, then most families will receive six payments in 2021, one each month from July through December. The law does give the IRS wiggle room to begin the payments later in 2021 and to make them less often than monthly if needed.

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Amount of Monthly Payments

picture of a father and son sitting on a couch holding a lot of moneypicture of a father and son sitting on a couch holding a lot of money

Question: How much will a family get each month?

Answer: The advance payments will account for half of a family’s 2021 child tax credit. The amount a family receives each month will vary based on the number of children in the family, the ages of the kids and the amount of the family’s adjusted gross income. For example, for families who qualify for the full $3,000 ($3,600 for children under age 6) credit per child, if monthly payments were made, this will result in monthly payments of $250 per child ($300 per child under age 6) for six months. Families with higher incomes who qualify for the $2,000 credit will get monthly payments of $167 per child for six months.

Take a family of five with three children ages 12, 7 and 5. Assuming the family qualifies for the higher child credit and doesn’t opt out of the advance payments, they could get $800 per month from the IRS from July through December, for a total of $4,800. They would then claim the additional $4,800 in child tax credits when they file their 2021 federal tax return next year.

If that same family with three children qualifies for the $2,000 per-child credit and doesn’t opt out of the advance payments, they could get $500 per month from the IRS from July through December, for a total of $3,000. They would then claim the additional $3,000 in child tax credits when they file their 2021 Form 1040 next year.

Use our 2021 Child Tax Credit Calculator to see how much you’ll get!

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Changes to Your Family or Income

picture of man holding sign saying "Lost My Job"picture of man holding sign saying "Lost My Job"

Question: What if my family circumstances change during the year and I have more income or less income than shown on the 2019 or 2020 return that I filed with the IRS?

Answer: As mentioned above, the IRS will generally base eligibility for the credit and advance payments, and calculate the amount of the advance payment, based on previously filed tax returns. It will first look at your 2020 return. If you haven’t filed a 2020 return, the IRS will look at your 2019 return. The IRS will assume that the number of children and the income that you reported on your 2020 (or 2019) return are the same for 2021. It will account for the passage of time only for determining the age of the children.

The American Rescue Plan requires the IRS to develop an online portal so that you can update your income, marital status and the number of qualifying children. So, if your circumstances changed in 2021, and you believe those changes could affect the amount of your child credit for 2021, go onto that portal once it is up and running and update it for the correct information.

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New Babies in 2021

picture of two women with a new babypicture of two women with a new baby

Question: What if I had a baby this year? Will I get advance payments?

Answer: As discussed, the American Rescue Plan calls for the IRS to develop an online portal, so that you can update certain information, including the number of qualifying children. It is hoped that this web tool will be up and running by July. So, if you had a baby in 2021, you could update the portal so the IRS will know to begin sending you payments. If you decide not to do this, you’re not out of luck. You won’t get the payments, but you’ll be able to account for your child when you file your 2021 return next year. Provided you are otherwise eligible to take the child credit, you can take a child tax credit of up to $3,600 for your baby on your 2021 Form 1040.

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Opting Out of Advance Payments

picture of two block letters spelling "no" on a tablepicture of two block letters spelling "no" on a table

Question: I know I will qualify for a child tax credit for 2021, but I don’t want to receive advance payments. Is there a way of opting out?

Answer: Yes. People who want to opt out of the advance payments and instead take the full child credit on their 2021 return can do so through the online tool that the IRS will develop.

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Social Security Numbers for Children

picture of three Social Security cardspicture of three Social Security cards

Question: My child doesn’t have a social security number. Can I claim the child credit or get advance payments?

Answer: No. The American Rescue Plan didn’t eliminate the requirement that only children with Social Security numbers qualify for the child credit. You must put your child’s name, date of birth and Social Security number on the Form 1040.

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Offset for Back Taxes or Child Support Arrears

picture of man's hand hold a note saying "pay child support"picture of man's hand hold a note saying "pay child support"

Question: Will monthly payments be reduced for taxpayers who owe back taxes or child support?

Answer: No. The IRS cannot take the payments to offset past-due federal taxes, state income taxes, or other federal or state debts. The same goes for people who are behind on child support payments. However, there are no protections against garnishment by private creditors or debt collectors.

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Taxation of Advance Payments

picture of three twenty-dollar bills laying on a tax formpicture of three twenty-dollar bills laying on a tax form

Question: Do I have to pay tax on the payments I get?

Answer: No. The payments that you receive are advance payments of the 2021 child tax credit, so they are not taxable. On your 2021 Form 1040 that you file next year, you will reconcile the monthly payments that you receive from the IRS in 2021 with the child tax credit that you are actually entitled to. The law requires the IRS to mail out a notice by January 31, 2022, showing the total amount of payments made to you during 2021.

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Paying Back Overpayments

picture of one person handing money to another personpicture of one person handing money to another person

Question: Do overpayments of the child credit need to be paid back?

Answer: It depends. With advance payments of the child tax credit, there will sure to be instances in which families receive more in advance child tax credit payments from the IRS than they are otherwise entitled to. And the American Rescue Plan contemplates this by providing a “safe harbor” for lower- and moderate-income taxpayers.

Families with 2021 adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return and $60,000 on a joint return won’t have to repay any credit overpayments that they get. On the other hand, families with 2021 adjusted gross incomes of at least $80,000 on a single return, $100,000 on a head-of-household return and $120,000 on a joint return will need to repay the entire amount of any overpayment when they file their 2021 tax return next year. And families with 2021 adjusted gross incomes between these thresholds will need to repay a portion of the overpayment.

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IRS’s Ability to Make Advance Payments

picture of sign on IRS building saying "Internal Revenue Service"picture of sign on IRS building saying "Internal Revenue Service"

Question: Is the IRS up for the challenge?

Answer: It should be, but there are concerns. Many tax experts and some lawmakers question whether the IRS, with its out-of-date computer systems, shrunken work force and its myriad of other duties, will be fully able to deliver periodic child credit payments.

Setting up a new program to deliver regular payments to taxpayers who must meet complex eligibility requirements to qualify for the child credit will be a challenge for an agency that is not used to sending out periodic payments. The IRS will need more funding for such a big undertaking. The American Rescue Plan gives $400 million to the IRS to take on the additional work, but some experts question whether this is enough. The IRS says that to facilitate advanced payments of the credit, it will have to build a system to compute and recompute payments as taxpayers provide new information. Such a system must also be able to issue and track payments, as well as reconcile all payments sent out to each taxpayer during the year with the taxpayer’s credit taken on the tax return. The agency will also need to develop a program to flag returns that don’t accurately include all advance payments received during the year.

Another issue that the IRS will have to deal with is how to minimize the potential for fraud when it comes to refundable child tax credits. For example, the IRS estimates that in 2019 it improperly paid $7.2 billion in such refundable credits.

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Post-2021 Child Tax Credit

picture of numbered blocks on a table arranged to 2022 with last block being changed from a one to a twopicture of numbered blocks on a table arranged to 2022 with last block being changed from a one to a two

Question: Will the higher child tax credit and advance payments eventually be made permanent?

Answer: Yes, if Democratic lawmakers get their way. Remember that the child tax credit expansions apply only for 2021. Some Congressional Democrats would like to see the enhancements made permanent, touting the impact that a higher and fully refundable child tax credit would have on reducing child poverty in the United States. Democratic lawmakers have already introduced bills in the House and Senate to make permanent a fully refundable higher credit of $3,000 per child ($3,600 per child under 6) plus advance payments of the credit. It’s too soon to tell whether these changes will eventually be made permanent, but it could very well happen. According to Congressman Richard Neal (D-MA), the Democratic Chairman of the House Ways & Means Committee, the child tax credit expansions are unlikely to go away.

Source: kiplinger.com

Stimulus Check Warning: IRS Can Reduce Your Recovery Rebate Credit for Child Support or Other Debts Owed

Your first- or second-round stimulus check couldn’t be taken away to pay back taxes or other government debts you owe. Second-round stimulus checks couldn’t be garnished to pay child support arrears or money owed to private creditors or debt collectors, either. But what if you didn’t receive a stimulus check – or didn’t receive the full amount – and you’re expecting to get the stimulus money your entitled to by claiming the Recovery Rebate credit on your 2020 tax return?

Unfortunately, thanks to a little-known provision in the COVID-relief law passed in December, most of those protections don’t apply to Recovery Rebate credits. So, if you get a refund on your 2020 tax return because of the credit, the IRS can take it away to pay any child support, state taxes, or other government debts you owe. Banks and other creditors and debt collectors may be able to snatch your refund, too.

The IRS is aware of this situation and has provided some limited relief (i.e., it won’t reduce refunds to pay federal taxes owed by people who claimed the Recovery Rebate credit on their 2020 tax return). Congress could step in and change the law, too. But for now, garnishment of any tax refund you get this year is possible – even if the refund is entirely based on the Recovery Rebate credit.

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Stimulus Checks vs. Recovery Rebate Credits

Stimulus checks are actually just advance payments of the Recovery Rebate tax credit. As a result, when you calculate the credit amount on your 2020 tax return, you’ll have to subtract the combined total of your first- and second-round stimulus checks (assuming you got them). If you still have a credit left after subtracting out these stimulus payments, it will lower your tax bill, trigger a tax refund, or make your refund bigger. If the amount of your stimulus checks equal or exceed the amount of the credit, you don’t have to repay the difference.

The amount of each stimulus check and the amount of your Recovery Rebate credit are generally calculated in the same way. However, the IRS relies on different sources of information to determine the amount of each – that’s one of the reasons why the two amounts could be different. For first- and second-round stimulus checks, the IRS mainly looked at your 2019 tax return. If you didn’t file a 2019 return, they looked for a 2018 return to calculate first-round payments. If you didn’t file a 2018 or 2019 return, the IRS may have gotten the information it needed from a special online portal for non-filers or from a government agency that pays you benefits, such as the Social Security Administration or Department of Veterans Affairs.

There are other reasons why the combined total of your first- and second-round stimulus checks and your 2020 Recovery Rebate credit are not equal. For instance, if you had a child in 2020, the extra $500 or $600 amount added to first- and second- round stimulus checks for qualifying children wouldn’t have shown up in your stimulus payments, but the extra amounts will be tacked on to your Recovery Rebate credit. Some Americans had their stimulus checks reduced because of their 2019 income, but because of lost income in 2020 their Recovery Rebate credit won’t be lowered. Many people didn’t receive one or both of their first two stimulus checks simply because the IRS didn’t have enough information to process a payment for them. Prison inmates were unlawfully denied their first-round payments, but the correct amount will be included in their tax credit. There are many other situations that could trigger a positive Recovery Rebate credit on your 2020 return, including that the IRS simply messed up and sent you a stimulus check for the wrong amount.

Are Recovery Rebate Credit Garnishments Unfair?

Because of the tax-law change made in December, “the rug is being pulled out from under eligible individuals with outstanding debts,” said Erin Collins, National Taxpayer Advocate, in a January 28 blog post. “Since the spring, the IRS reassured these taxpayers that if they claim the [recovery rebate credit] when they file their 2020 returns, they will get the full amount of stimulus money they are eligible for and be made whole. Now that reassurance turns out to be inaccurate based upon the law change.”

Here’s the situation, according to Collins:

  • People with certain outstanding debts who received the full amount of their stimulus checks didn’t have their payments subject to garnishment (except for past-due child support for first-round payments), but
  • People with similar outstanding debts who didn’t receive the full amount of their stimulus checks will receive a reduced Recovery Rebate credit or nothing at all when they claim it on their 2020 tax return.

“This disparate result undermines public confidence in the fairness of the tax system,” said Collins. “Financially struggling taxpayers who were entitled to receive the full amount of the [stimulus check] last year but did not have effectively been harmed once. It is unfair to harm some of these taxpayers a second time by seizing some, or all, of their stimulus payments.”

Possible Solutions

In a March 15 blog post, Collins said the IRS won’t reduce Recovery Rebate credits to satisfy federal tax debts. That will help, but it won’t stop refund reductions to pay for other debts. Plus, there’s still the question of what to do about people who filed their 2020 tax return and had their refund reduced or taken before the IRS implements this new policy.

A better solution for taxpayers is for Congress to reverse the December change so that all the garnishment protections allowed for stimulus checks are made applicable to the Recovery Rebate credit as well. This adjustment wasn’t included as part of President Biden’s $1.9 trillion American Rescue Plan, but perhaps it will be addressed in future legislation.

Source: kiplinger.com