Good news for parents of babies born in 2021
Expect to receive $5,000 per child with your tax return filing for 2021 in 2022. Although we cannot be 100% certain when exactly the IRS will accept electronically filed tax returns, we can predict that it will happen at the end of January 2022. The average refund time is approximately 10 days, so refunds should be hitting bank accounts by early February 2022.
How did you calculate $5000?
The math is really simple. Your child will qualify for stimulus 3 under the provision of the American Rescue Plan in the amount of $1,400. In addition, the United States Congress expanded the Child Tax Credit to $3,600 for kids under the age of 5.
During the original implementation stage of this law, the IRS told us that eligible taxpayers will be able to add newborn’s information into a newly created system. Unfortunately, the IRS has had many issues related to being understaffed and underfunded and was not able to implement this as promised. As a result, all applicable funds will be issued at the time of tax return filing.
Unfortunately, not every newborn will qualify to receive stimulus 3, as payments begin to phase out as parents’ income increases. If a parent files a tax return as a single filer, stimulus check will be phased out if Adjusted Gross Income (AGI) is $75,000 or more. Obviously, for that exact reason, we do not recommend for single parents to use filing status “single” and instead recommend using “head of household” status. Using the head of household will allow more families to qualify as threshold jumps to $112,500. Married couples will see the phase-out at an income level of $150,000. Stimulus check will be completely phased out for single filers with an AGI above $80,000, head-of-household filers with an AGI over $120,000, and joint filers with an AGI exceeding $160,000.
If you find yourself on the border of qualifications, consider contributing to an IRA (not Roth IRA) in order to reduce your AGI. Contribution to the IRA for the prior year can be made up until the tax deadline of April 15. Self-employed should also consider reviewing their tax return for often-overlooked tax deductions, such as SEHI (Self-Employed Health Insurance) and home office deduction.
When filing a 2021 tax return, it is important to complete extra forms to claim this money via Recovery Rebate Credit. Families who don’t earn enough to be required to file a tax return can still receive payments by filing a zero tax return or using the IRS tool for non-filers.
For Child Tax Credit payments income qualifications are a lot more generous. The credit begins to phase out if your Modified Adjusted Gross Income (AGI) is above $400,000 on a joint return or over $200,000 on a single or head-of-household return. Once you reach the $400,000 or $200,000 modified AGI threshold, the credit amount is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount.
It is important to note, that all other eligible parents are currently receiving advance payments of Child Tax Credit in the amount of $300 for kids under 6 or $250 per month for kids under 18.
What if I have twins? Will I get $10,000?
Yes, you are eligible to receive $5,000 per child, so having twins will result in a $10,000 payment.
What will I get if I become pregnant in 2021, but have a child in 2022?
Under current law, an extended amount of child tax credit only applies to 2021. Democrats are pushing to make it permanent, while President Joe Biden has proposed a four-year extension through 2025. We are expecting to learn what happens next in the near future.
Can I still get Earned Income Credit?
Yes, you can. Earned Income Credit uses complex different set qualification rules for its recipients. First and foremost, you must have earned income, meaning you actually have to be employed or self-employed, to qualify for this specific money on your tax return. If you receive unemployment, you do not qualify, because this type of income is considered to be unearned (it’s a benefit you receive). The same rule applies to other passive types of income, such as income earned from renting real estate, investing in the stock market, or receiving pension distributions.
In addition, you cannot have an investment income above $3,650. This means that if your rental property or stocks bring you an annual income above $3,650, you won’t qualify.
You cannot use filing status “married filing separately”. You can file your taxes as “single”, or “head of household”, or “married filing jointly”, just not as a married person filing his/her taxes without a spouse.
You also must be a US citizen or resident alien all year and reside in the US for over six months. Obviously, all members of your family must have a valid social security number.
As you see, qualifications are much more restrictive versus Child Tax Credit and stimulus 3, not to mention income qualifications are way lower.