in

These tax credits could boost refunds for low-income families this year

kate_sept2004 | E+ | Getty Images

For millions of American families, the new enhanced child tax credit has meant extra money on a monthly basis.

Even better, there are other tax credits that were improved during the pandemic that folks will be able to use to boost refunds, or potentially offset tax liabilities.

That’s because the child tax credit payments are just half of the total benefit, meaning that families will see the other half applied when they file their 2021 tax returns next year. Thus, getting the money early may impact tax refunds for some families.

More from Invest in You:
Democrats’ $3.5 trillion budget plan includes major help for families with kids
HBCUs clear student balances, cancel debt with federal funds
Half of young investors invested stimulus money. Here’s where they put it

The other tax credits will be helpful in supporting families as some of the other [pandemic] 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 and dependent care tax credit

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

This credit – which is separate from the child tax credit – gives working parents extra help at tax time for costs associated with caring for children under the age of 13 and other eligible adult dependents.

For the 2021 tax year, the credit was expanded to $8,000 per dependent from $3,000 and is capped at $16,000 instead of $6,000. In addition, some families, depending on their income, will get the benefit as a refundable credit, meaning it will either reduce what they owe the IRS or be returned in the form of a refund.

This helps the lowest-income families get money back, as making credits fully refundable means you don’t have to have any taxable income to take advance of it.  

“It can help families specifically with childcare costs, which of course are another urgent financial need that many parents have especially during the coronavirus crisis,” said Burnside.

Earned income tax credit

The earned income tax credit was also given a boost in 2021 and future years because of the pandemic. It also helps low- to moderate-income workers, both with and without children.

The earned income tax credit now ranges from $1,502 to $6,728 depending on your income and number of children in your household. Because many families lost income due to the pandemic, which could reduce the amount of the credit they would be eligible for, they can use their earnings from 2019 to calculate the benefit if it means they’ll get more money in 2021.

Like other credits, this is also refundable, meaning that families will either see it reduce their tax liability or get the money back as a refund next year.

This year, the maximum benefit from the earned income tax credit was also expanded for workers without children, nearly tripling to $1,502, from $543. The American Rescue Plan also increased the income range where such workers can claim the credit to about $21,000 from $16,000 and expanded the age range of those eligible to include adults aged 19 to 24. These changes will help support some 17 million people according to an estimate from the Center on Budget and Policy Priorities.

“We know the EITC currently lifts more families out of poverty than food stamps, housing subsidies and unemployment insurance combined,” said Otis Rolley, senior vice president of the U.S. equity and economic opportunity initiative at the Rockefeller Foundation. The expansion, he added, will go even further to lift people out of poverty.

Some people may also get a boost on the state level. Due to the pandemic, at least 10 states have thus far decided to use funds from the American Rescue Plan to add or improve state-level earned income tax credits.

What’s next

Of course, families who opted out of the advance child tax credit payments will generally see either a much larger than usual refund for 2021, or have their liability reduced by more than usual, as they’ll get the entire enhanced benefit at tax time.

And, there are many individual considerations that go into calculating each families’ tax liability and potential refunds. This year, because of the changes, it may be a good idea for families to enlist the help of a professional tax preparer to make sure they are taking advantage of all the credits they are eligible for. Many free services exist to help low-income folks prepare and submit their taxes.

While some of the changes that will impact refunds are only for 2021, there may be more updates on the horizon. Democratic lawmakers intend to extend the child tax credit and make the earned income tax credit boost permanent.

SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox.

CHECK OUT: How to make money with creative side hustles, from people who earn thousands on sites like Etsy and Twitch via Grow with Acorns+CNBC.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

Source: Investing - personal finance - cnbc.com

Walgreens Boots Alliance announces fresh slate of executives, as new CEO Roz Brewer assembles team

Jackson Hole may be virtual, but investor anxieties remain real