The New Stimulus Bill Includes Monthly Payments to Millions of Parents. Here's How It Works

Congress just passed a major expansion of a tax credit that experts say will drastically reduce child poverty and reach more than 90% of American children.

The changes to the Child Tax Credit are one of the key provisions in the American Rescue Plan Act, a $1.9 trillion stimulus package that includes expanded unemployment benefits and the long-awaited $1,400 stimulus checks. President Joe Biden signed the bill into law Thursday.

Some 69 million households are set to benefit from the Child Tax Credit expansion in 2021, according to the New York Times, up from the estimated 48 million last year.

In its current iteration, the credit allows parents to claim up to $2,000 per year for each qualifying child in their care. The expansion increases that number to $3,600 per child under the age of 6 and $3,000 for all other children — including dependent 17-year-olds who were previously considered ineligible.

The bill also removes the earnings floor, which previously excluded the poorest families from accessing the credit by requiring minimum earnings of $2,500 annually to qualify. Perhaps the biggest change, though, is that the bill allows for part of the credit to be paid out in advanced, monthly payments, rather than through the typical reduction on their federal income taxes.

So if you’re a parent or guardian — or you’re going to become one in 2021 — there’s a high chance you’ll be affected. Tax law can be loaded with confusing jargon and buzzwords, so we’ve broken down everything essential for parents to know.

Who’s captured in the expanded eligibility?

The American Rescue Plan outlines two key changes in eligibility for the 2021 Child Tax Credit. First, it raises the age cutoff from 17 to 18. That temporarily closes a loose end that has been an annoyance to parents for decades. In recent years, you could only claim a $500 credit, instead of the full $2,000, if you had a dependent aged 17 or older. And before 2018, 17-year-olds didn’t qualify for any credit; instead parents could claim a dependent exemption, which allows you to exclude some income from your taxes.

Additionally, while the stated goal of the Child Tax Credit, one of three tax breaks for children, is to help eliminate childhood poverty, critics have long noted that it actually does relatively little to help the poorest families, since you had to earn at least $2,500 per year to qualify. To fix this problem, the bill expands eligibility by removing that earnings floor altogether.

But getting a tax credit into the hands of folks who would typically not have to pay income tax at all requires some extra legwork, which is why the other changes for 2021 — partially paying out the credit in advance and making it fully refundable — are essential.

What are the new income requirements?

The tax cuts the Trump administration spearheaded in 2017 increased the income cutoffs for claiming the full Child Tax Credit. But now lawmakers are walking that back to target the larger payments to lower- and middle-income households.

Under the new provisions, the enhanced tax break would begin to phase out at $75,000 in adjusted gross income for single filers, $112,000 for head-of-household filers, and $150,000 for joint filers. By comparison, phase-outs in 2018 and 2019 did not begin for single and head-of-household filers until $200,000 and $400,000 for joint filers.

This brings up one major criticism of the expansion: For families (especially single parents) in expensive metro areas like San Francisco or New York, lowering the income threshold without consideration for local inflation leaves out many middle-income earners.

How will the payments work?

Probably the most significant change to the 2021 tax credit is that the bill allows for half of the credit ($1,800 for children under the age of 6 and $1,500 for older children) to be distributed via monthly payments from the IRS between July and December 2021.

While it’s still unclear how these payments will be distributed or if parents will need to manually opt in, the bill states a preference for direct deposit payments.

Under the current Child Tax Credit, parents have had two routes for receiving the money, neither of which involve monthly cash payments. The first is to claim each eligible child ahead of time on your W-4. The amount of federal income tax that gets taken out of each paycheck for that year is then reduced to reflect however many claims you make.

The second would be to skip the allowances on your W-4s, pay income taxes as usual and then come tax season, claim the number of children on your return and receive a refund for the amount of money that was overpaid.

Now, with the changes, parents still have the option for either of those routes, but they’ll see half of their credit via cash payments starting in July.

Here’s how that would look: Let’s say you’re a married couple earning less than $150,000 and you have two children under the age of 6. You qualify for the maximum amount of the credit, $3,600 per child, for a total of $7,200. You’ll receive half of that — $3,600 — in monthly payments of $600 during the second half of the year.

By front-loading a portion of the benefit in the form of monthly payments, parents ranging from the most impoverished to the working and middle class will have more cash on hand throughout the year.

While the extra money is obviously meant to benefit families — whose annual expenses are approximately $12,000 more per child than child-free households — the Child Tax Credit is not a welfare program like the Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF). There are no restrictions on what you can and can’t spend the money on.

What does “fully refundable” even mean?

The new enhancements make the credit fully refundable, whereas before it was mostly considered non-refundable (although some low-income families qualified for a partial refund up to $1,400). This is another move to ensure that the lowest-income parents, who owe less in federal income taxes, get more money in their pockets.

Under the previous rules, if the amount of child tax credits you qualified for was more than the amount of income tax you owed, the leftover value of the credits would not be paid to you — that’s the “non-refundable” part. For example, if you owed $2,500 in federal income tax and qualified for $4,000 in child tax credits, your federal income tax would just be reduced to zero.

Now, though, under the same scenario, you would qualify for a refund of the credit, meaning that $4,000 would cover your $2,500 tax liability and then you’d receive the remaining $1,500 after filing your taxes.

So how much money are parents getting?

It wouldn’t be an unfair assessment to say that the American Rescue Plan is the most generous stimulus bill for parents thus far. With a more than 50% increase to the Child Tax Credit, millions of families are likely going to notice more money in their bank account. But the total amount of money most parents are eligible for from the stimulus package is actually much more.

On top of the enhanced Child Tax Credit, the bill temporarily increases the income cutoffs and value of the Child and Dependent Care Tax Credit, designed to help offset the cost of child and dependent care for working families.

The credit, which has also been made fully refundable, previously had a maximum value of $2,100. The new maximum value for 2021 is up to $4,000 for one child’s expenses and $8,000 if you have childcare expenses for more than one kid. The income level for when the credit starts phasing out has also seen a significant bump from $15,000 to $125,000.

Parents who qualify for the next stimulus check will also receive $1,400 each, plus an additional $1,400 for each dependent, including adult dependents who were left out of earlier stimulus checks.

If the previously mentioned family of four qualifies for both tax credits and full stimulus checks, they’re set to receive $20,800 from the federal government over the course of 2021.

How long will these changes last?

While the changes to the Child Tax Credit are a major overhaul of some of the credit’s most backwards features, one of the key takeaways to understand is that all of these changes are temporary. They only apply to the 2021 tax year — for now.

Many supporters and lawmakers are pushing to make the changes permanent, and some want to go even further in restructuring how family benefits will work.

Most recently, Sen. Mitt Romney (R-UT) proposed scrapping most child welfare and tax credits altogether and replacing them with a family allowance at a maximum of $15,000 each year. And in 2019, Sens. Sherrod Brown (D-OH) and Michael Bennet (D-CO) proposed permanently turning the Child Tax Credit into an annual child allowance up to $3,600 per child.

More from Money:

Who Qualifies for a $1,400 Stimulus Check? Eligibility Rules Explained

Extended Unemployment Benefits: What the New Stimulus Bill Means for Jobless Americans

Will the IRS Postpone the Tax Deadline? Politicians and Tax Preparers Demand an Extension