COVID-19 IRS Updates
How Will the New 2021 Tax Deadline and COVID Relief Bill Affect Your IRA Contributions?
You not only have until May 17 the file your taxes — you also have until that date to make contributions to your IRA.
In March 2021, the American Rescue Plan was signed into law to help Americans struggling financially from the COVID pandemic. This $1.9 trillion plan comes with a lot of aid, and just like previous stimulus programs, a lot of that aid will reach American’s pockets through tax credits.
An exciting tax credit for many families is the Child Tax Credit. This tax credit, which is available every year, received an overhaul for 2021 to get more help to families who need it.
Eagerly awaiting this additional tax credit? We have the details you need to know.
For taxpayers who qualify for the full tax credit, they will receive $3,600 for each qualifying dependent child age five and under and $3,000 for each qualifying dependent child between 6 and 17 years old.
This is a solid increase from the 2020 child tax credit, which was $2,000 per qualifying child under the age of 17. Not only does the credit increase (from $2,000 to $3,000 or $3,600), but families with children who are 17 can qualify for the credit.
Like the previous child tax credit, the 2021 Child Tax Credit restricts who will qualify for the credit based on adjusted gross income. The income limits for qualifying for the full tax credit are a little lower in 2021 than they were in 2020.
The income thresholds are:
$75,000 for single filers
$112,500 for head of household filers
$150,000 for married joint filers
At or below income levels above those thresholds, you can qualify for the full tax credit. But if your income level is above the threshold, there is a gradual phase-out.
For example, if you’re a married couple with a six-year-old and a three-year-old with an adjusted gross income of $90,000, you’ll be eligible for a tax credit of $6,600 ($3,600 for the three-year-old and $3,000 for the six-year-old).
It’s also important to note that families in Puerto Rico and U.S. Territories will qualify for this tax credit.
For anyone who cares about details, this is a tax credit, which means that it reduces your tax liability dollar for dollar. So if you qualify for the entire $3,600 tax credit for your young child, your tax liability is reduced by $3,600.
It’s also a fully refundable tax credit, which means that even if you don’t owe any money in taxes, you’ll still qualify to receive this credit.
One of the stand-out features of this new tax credit (aside from the increase in value) is that you won’t have to wait to receive your money. Normally, you’ll need to wait until filing your taxes to take advantage of a tax credit for the year. For example, a 2021 tax credit is usually available to you in 2022 when you file your tax return.
Not so for this one. One goal was to get money into the hands of people as quickly as possible to help struggling families. So half of the tax credit will be made in periodic payments from July through December 2021. You’ll get the other half of the tax credit when you file your 2021 tax return.
For example, if you qualify for the full tax credit for one child, you can expect to receive $1,800 (half of the tax credit) in 2021 and the remainder when you file your 2021 tax return. The $1,800 will come in periodic payments, which are approximately the same amount. If they end up making payments once per month, July - December, that would mean you’ll receive $300 per month. The payment schedule would look like this:
July 2021: $300
August 2021: $300
September 2021: $300
October 2021: $300
November 2021: $300
December 2021: $300
April 2022 (or whenever taxes are filed): $1,800
There has been no set start date announced yet, but for now, you can expect to start receiving payments sometime in July.
The IRS is going to do its best to estimate how much tax credit you should receive, using your 2020 tax return. If that’s not available, they’ll use your 2019 tax return.
But that’s not a perfect estimate. There may be instances where you are overpaid, for example, if your income goes up in 2021 and you no longer qualify for the full tax credit. If that happens, you’ll most likely be on the hook for repaying that money.
While this money will come automatically to many families starting this summer, there are some things you should do to help increase your chances of getting the correct tax credit amount.
File your tax return: If you have yet to file your 2020 tax return, now is the time to do that. The IRS will base their estimates on information from your 2020 tax return or 2019 tax return, so getting them the most up-to-date information to do their estimation is important.
Keep an eye out for their online portal: The American Rescue Plan requires the IRS to create an online portal that allows parents to update their information to get the most accurate payments in 2021. You’ll want to make updates to your information if your situation has changed from 2020. For example, if you have a new baby in 2021 or if you got divorced and no longer have a qualifying dependent child living with you.
This summer, qualifying families will start to receive their first payments of the Child Tax Credit. If that’s you, be on the lookout for that first payment. In the meantime, make sure the IRS has your most up-to-date information by filing your 2020 tax return. A Taxfyle professional can help you get started filing your tax return today.
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