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Explained: Why the $3,000 child tax credit under Biden’s Covid relief package is revolutionary

The proposal is not new. It is an expanded version of a pre-existing policy. Here is all you need to know about the Child Tax Credit, and what it means for American families.

By: Explained Desk | Panaji |
Updated: March 11, 2021 8:26:22 pm
President Joe Biden signs executive orders in the State Dining Room of the White House, Tuesday, Jan. 26, 2021, in Washington. Vice President Kamala Harris listens at left. (AP Photo/Evan Vucci)

Buried in US President Joe Biden’s historic $1.9 trillion coronavirus relief package, passed by the Senate on Saturday, is a radical provision that could benefit approximately 66 million American children.

The Biden administration’s American Rescue Plan includes the enhanced Child Tax Credit bill, which, if approved, would provide parents with a whopping $3,600 (Around Rs 2.6 lakh) per child under the age of six and $3,000 (around Rs 2.2 lakh) per child of age six through 17 for a single year.

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The proposal is not new. It is an expanded version of a pre-existing policy. Apart from making the child tax credit available for more families in the US, the latest coronavirus stimulus bill would also increase the overall amount received by parents.

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“This plan gives those families who are struggling the most the help and the breathing room they need to get through this moment,” President Joe Biden said. “Taken altogether, this plan is going to make it possible to cut child poverty in half.”

Here is all you need to know about the Child Tax Credit, and what it means for American families.

So what exactly is the Child Tax Credit?

The Child Tax Credit is given to parents and caregivers to help reduce their tax bill. Under the existing policy, American taxpayers can claim a credit of up to $2,000 for each qualifying child — a US citizen under the age of 17, who has lived with the taxpaying caregiver for a minimum of six months.

Taxpayers also have the option of availing of a partial refund if the credit exceeds the amount of taxes that the family owes. As of now, parents can get up to $1,400 of the balance as a refund, which is known as the additional child tax credit (ACTC) or refundable CTC.

To be eligible for the credit, a taxpayer must earn at least $2,500. Married couples filing jointly with an adjusted gross income (AGI) of up to $400,000 can avail of the full credit, as can individuals with an AGI of less than $200,000.

For people earning more than these limits, only a partial credit is permitted. The credit is reduced by $50 for every $1,000 of additional income.

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How does the Child Tax Credit policy change under the American Rescue Plan?

Not only does the new American Rescue Plan amend the eligibility rules of the Child Tax Credit, it also substantially increases the amount of credit received by American parents. Under Biden’s Covid relief package, taxpayers stand to receive a credit of $3,600 per child under the age of six, and $3,000 for children over six years of age.

Significantly, instead of just receiving the funds at the year, parents and caregivers now have the option of receiving half the credit “periodically” between July and December 2021. They will get the other half when they file their tax return in 2022. Receiving the Child Credit tax as cash payments on a monthly basis rather than as a lump sum during tax season will make it easier for families to pay their bills and other obligations as and when required.

Another big change is that the credit will become fully refundable for the year. Under the new provisions, eligible taxpayers will receive the full $3,000-$3,600 as a refund, as opposed to just up to $1,400.

Single parents earning as much as $75,000 and couples with an AGI of $150,000 can receive the full benefit. After these limits, payments would phase out. The credit would be phased out completely for people earning over $75,000 a year, or married couples filing jointly with an AGI of over $170,000.

Parents no longer have to be earning a minimum of $2,500 to get the credit. The American Rescue Plan does away with that threshold, making it possible for unemployed parents and caregivers to claim the credit.

What would this mean for the average American family?

The expanded tax credit would act as a guaranteed income for all the children who qualify — a policy similar to the children’s allowances paid in several other wealthy countries.

Biden’s new relief package includes several policies to help bring Americans out of poverty amid a coronavirus pandemic-induced economic crisis. With the new Child Tax Credit policy, a vast majority of American families will finally be able to access the credit.

Just last month, Biden signed executive orders to help expand food assistance and deliver stimulus checks to low-income Americans. Another was signed with the aim of raising the minimum wage to $15 for the federal workforce.

The Biden administration hopes that the new proposal will reduce poverty in black families by one third and in Hispanic families by 40 per cent, CNN reported.

What’s next?

The House of Representatives is set to take a final vote to approve Biden’s coronavirus relief plan on Wednesday, following which it will go to the President’s desk for his signature.

While in the plan, the expansion of the Child Tax Credit is temporary, Democrats plan on pushing for a permanent increase in funds given to American parents and caregivers.

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