Look, I get it. You’re not accustomed to reading an article about the intricacies of the tax law and walking away ready to throw down. But this time is different.
This week, the House of Representatives will vote on the latest round of COVID relief, and should it pass both chambers and be signed into law, there will suddenly become a MUCH bigger tax break for adding a member to the family. But there’s a catch: this new incentive will only be in place for 2021, which according to my calendar, has only ten months remaining. And since it takes a full nine months to go from copulation to childbirth, time is of the essence.
To understand what’s at stake, let’s take a look at the current construction of one of the primary tax benefits of having a kid – the child tax credit (CTC). Then, we’ll layer on how the credit will change for 2021 if the American Rescue Plan – President Biden’s $1.9 trillion stimulus package – becomes law.
Current Child Tax Credit Rules
The CTC has been around since 1997, and its purpose is clear: Congress recognizes that taxpayers with children have to pay for necessities like food, clothing, and Nintendo Switch V-Bucks, leaving less cash lying around to satisfy their annual income tax bill. As a result, as the law stands today, taxpayers may claim a CTC of up to $2,000 for each child who hasn’t turned 17 by the end of the year. As a reminder, a credit results in a dollar-for-dollar reduction in your tax liability.
Example. H&W have two children, ages 2 and 5. H&W have a tax liability of $10,000 before credits. After reduction for the $2,000 CTC that H&W can claim for each child, their final tax liability will be $6,000.
But what if H&W’s tax bill is only $1,000 before the $4,000 credit? After 2017, up to $1,400 of the $2,000 CTC is now refundable. The refundable portion is generally capped at 15% of the excess of earned income over $2,500.