These tax credits could improve refunds for low-income families in 2021

These tax credits could improve refunds for low-income families in 2021

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For millions of American households, the newly increased child tax credit means extra money on a monthly basis.

Better yet, there are other tax credits that were reformed during the pandemic that people can use to increase refunds or potentially offset tax debts.

This is because the child tax credit payment is only half of the total benefit, meaning families will see the other half apply when they file their 2021 tax return next year. Thus, receiving money earlier can affect tax refunds for some families.

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More tax credits will help support families like no other [pandemic] The benefits expire, said Ashley Burnside, a policy analyst at the Center for Law and Social Policy.

Here’s what families and individuals need to know.

Child care and dependent care tax credit

The US $ 1.9 trillion bailout signed in March also expanded the child care and dependent care tax credit, a lesser-known benefit aimed at helping working families.

This credit, which is separate from the Child Tax Credit, provides working parents with additional tax-time support for costs associated with the care of children under 13 and other dependents. eligible adults.

For the 2021 tax year, the credit was reduced from $ 3,000 to $ 8,000 per dependent and capped at $ 16,000 instead of $ 6,000. Additionally, some families, depending on their income, will receive benefits in the form of a refundable credit, which means it will reduce what is owed to the IRS or be returned as a refund.

This helps low-income families get money back, as making the credit fully refundable means you don’t have any taxable income to take it up front.

“It can especially help families deal with child care costs, which is certainly another pressing financial need for many parents, especially during the coronavirus crisis,” Burnside said.

income tax credit

The earned income tax credit was also increased in 2021 and subsequent years due to the pandemic. It also helps low- and middle-income workers, with and without children.

The earned income tax credit now ranges from $ 1,502 to $ 6,728, depending on your income and the number of children in your household. Because many families have lost income due to the pandemic, reducing the loan amount they would be entitled to, they can use their 2019 income to calculate benefits if it means they will get more money in 2021.

Like other credits, it’s also refundable, meaning families will either see it reduce their tax liability or get the money back as a refund the following year.

This year, the maximum earned income tax credit benefit was also extended to childless workers, almost tripling from $ 543 to $ 1,502. American Rescue Plan has also increased the income limit where these workers can claim a credit from $ 16,000 to approximately $ 21,000, and the age limit for those eligible to include adults aged 19 to 24 has been widened. . These changes will help around 17 million people. From the focus on budgetary and political priorities.

“We know that the EITC is lifting more families out of poverty than is currently available on food stamps, housing subsidies and unemployment insurance,” said Otis Rowley, senior vice president of the ‘American Initiative for Equity and Economic Opportunity at the Rockefeller Foundation. He said this extension will go even further to lift people out of poverty.

Some people can also get a promotion at the state level. Due to the pandemic, at least 10 states have so far decided to use US bailout funds to add or improve the state-level earned income tax credit.

what will happen next

Of course, households that have opted for the child tax credit advance payments will usually see a much higher refund than the normal refund for 2021, or their liability will be reduced more than usual, as they need to be extended in time. full at tax time. . Will benefit from it.

In addition, there are many individual considerations that go into calculating each family’s tax liability and potential refund. This year, due to changes, it may be a good idea for families to hire a tax preparer to make sure they’re getting all the credits they’re entitled to. There are many free services available to help low-income people prepare and submit their taxes.

While some of the changes affecting refunds are only for 2021, there could be more updates on the horizon. Democratic lawmakers intend to expand the child tax credit and make the earned income tax credit permanent.

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