The American Rescue Plan Act of 2021 (" The Plan"), it exactly like it sounds a full-blown rescue for the people.
For 2020 the child tax credit (CTC) is worth $2,000 per kid under the age of 17 whom you claim as a dependent and who has a Social Security number. There are a lot of test that you would have to pass (Check out the test per the IRS) but in short you would have to prove:
1. The child is related to you. (Not your Brothers, sisters’ friend child)
2. The child lived with you for six months or more and,
3. You make less than $400,000 for Married and $200,000 for single/head of household.
The American Rescue Plan would temporarily expand the CTC for 2021. The top five changes are:
1. In 2020 if your child was 17 your CTC would fall from $2,000 to $500 (That sucks). The plan for 2021 would allow 17-year-old children to qualify in 2021.
2. In 2020 the CTC is $2,000 per child from age 0 – 16. The new plan for 2021 would increase the credit to $3,000 per child ($3,600 per child under age 6) for many families.
3. In 2020 you have to earn at least $2,500 to qualify for the CTC. The plan for 2021 would remove the $2,500 earnings floor.
4. In 2020 you cannot get the CTC till you file your taxes. The plan for 2021 would allow half of the credit to be paid in advance by having the IRS send periodic payments to families from July 2021 to December 2021.( Wild)
WHO IS NOT GOING TO GET THIS MONEY?
Do not get to happy people, CTC benefits starts to slow down and get lower when your income goes higher. The CTC would begin to phase out at:
· $75,000 on single returns.
· $112,500 on head-of-household returns
· $150,000 on joint returns.
Under the proposal, the IRS would look to the 2020 return to determine eligibility for the credit. If a 2020 return has not yet been filed, the IRS would look to 2019 returns.
The good news is people get phased out due to income would claim the regular credit of $2,000 per child. But they would have to reduce that $2,000 by the amount of any monthly payments they got if the IRS. (You did not file your 2020 by time the IRS stated to send out the monthly payments, or updated your information with the IRS.)
Let’s talk some more on that advance payment for it sounds like a bag of broken glass with money in it. You want to get the money but some will get cut.
The plan says the IRS will send out a check (Via direct deposits) periodically from July 2021 through December 2021. These periodic payments would account for half of the family's 2021 child tax credit. This is up to $250 per child ($300 per child under age 6) for six months. Side note- This summer of 2021 is going to be crazy.
THE IRS IS NOT READY BUT THEY READY
I would not hold my breath on this for the IRS is looking around like, no one asked me if I can do this. The plan gives the IRS just a few months' lead time to set up its computer systems to handle such an enormous, once in the life time, new payment program. The Plan says the IRS has to create an online portal so you can, if you want, update your income, marital status and the number of qualifying children. Side note- That is freaking crazy. Allowing people to self-certify and send them money. Yea I got five kids all of a sudden and I have a bridge for sale.
The good news is the IRS got some common sense and said they will allow the following:
· If you want, to opt out of the advance payments and instead take the full child credit on your 2021 return you can- that will also be done on the portal.
· The IRS knows that with advanced payments of the CTC, fraud and errors will follow. The plan anticipates this by providing a safe harbor for lower- and moderate-income taxpayers.
Families would not have to pay back the advance if there adjusted gross income is below:
· $40,000 on a single return
· $50,000 on a head-of-household return and
· $60,000 on a joint return would not have to repay any credit.
On the other side of this sharp blade, if your 2021 income is at least:
· $80,000 on a single return,
· $100,000 on a head-of-household return and,
· $120,000 on a joint return.
You would unfortunately have to repay the entire amount of any overpayment when they file their 2021 tax return next year. If you are in between you would have to repay a portion.
IS THE IRS BUILT FOR THIS?
The IRS Computer is one of the most powerful computers in the government. It had more computing power than the NASA computer that took us to the Moon. But the times have changed, NASA has gone to Mars and the IRS still cannot get past the moon.
The IRS has a lot of things against them, its out-of-date computer systems, shrunken work force and its maze of other responsibilities. They were putting stimulus payment in the wrong bank accounts for god sakes. Now you want them to send monthly checks? I know this plan for CTC is temporary, but we all know once you give the people money like this how can you take it away?
IRS NEEDS TO ASK FOR MORE MONEY.
The only way for this to run like clockwork is if the IRS asks for more money. “Show me the money” especially if the CTC and advance payments are eventually made permanent, which could very well happen. Expanded CTC would help or should be a way of reducing child poverty.
Creating a digital front door to confirm if you the taxpayer meets complex eligibility requirements to qualify for the child credit, track payments, and reconcile what you did or did not get will be a challenge for big IT companies with great developers. For an agency like the IRS that is not used to sending out periodic payments, and notorious for long hold times the $400 million they are getting in the plan is chump change.
Do not get me started on the fraud. The scammers are lacing up the sneakers for this one. How will the IRS deal with is how to minimize the potential for fraud when it comes to refundable child tax credits. I leave you with this, in 2019 the IRS estimates that in 2019 it improperly paid $7.2 billion and $2.1 billion in additional child tax credits American opportunity tax credit, respectively. [ see page 15 of the report].